You 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 lower the calculated value of
the investment?
Answer
a The total amount of cash flows remains the same, but more of the cash flows are
. received in the earlier years and less are received in the later years.
b The discount rate increases.
.
c. The discount rate decreases.
d The riskiness of the investment’s cash flows decreases.
.
e The cash flows are in the form of a deferred annuity, and they total to $100,000.
. You learn that the annuity lasts for only 5 rather than 10 years, hence that each
payment is for $20,000 rather than for $10,000.