Question

ou plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?a. The discount rate increases.b. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.c. The discount rate decreases.d. The riskiness of the investment's cash flows increases.e. The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

Answer 1

Answer & Explanation:

a. The discount rate increases

DECREASE a higher discount rate decreases the present value as the future cash flow is less worthy.

b. The cash flows are in the form of a deferred annuity, and the total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000

DECREASE As the 100,000 dollars are spread over a longer period their present value decreases

c. The discount rate decreases

INCREASE as the future cash flows are worth more in the present at a lower

d. The riskiness of the investment's cash flows increases

DECREASE  as the expected cash flow is lower at higher risk or the cost of capital will be higher in both cases, the present value will decrease.

e. The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

DECREASE as the future cash flows are less worthy as they are discounted for a higher factor.