Question

You are given two choices of​ investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of​ 4%, and Investment B has a discount rate of​ 5%. Which of the following is​ true?A. The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B.
B. The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B.
C. The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.
D. No comparison can be made - we need to know the cash flows to calculate the present value

Answer 1

Answer:

C. The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.

Explanation:

Typically, discount rate represents cost of capital or funds used to finance the investment. This implies that the higher the cost of capital , the lower the present value of cash inflow on the investment and vice-versa.

Hence, the present value of cash flows in Investment A is higher than the present value of cash flows in Investment B,  because A has a lower discount rate.