Question

When discount rate:

A.increases, the present value of any future cash flow increases.

B. decreases, the present value of the future cash flow does not change.

C. decreases, the present value of any future cash flow increases.

D. increases, the present value of any future cash flow does not change.

Answer 1

Answer:

C. decreases, the present value of any future cash flow increases.

Explanation:

An increase in the discount reduces the net present value (NPV). The net present value is the present value of the future projected future cash flows and inflows. The discount rate is the interest rate used to discount future value to the present time. It represents the acceptable or expected rate of return from an investment.

A high discount rate will require a lower level of investment today to earn the desired amount in the future.  A high discount rate indicates high returns are expected from the project.  Using a low discount rate increases the net present value, meaning high-value investment today will yield high returns in the future.

Answer 2

The present value of a given amount of money refers to the current value of a future amount of money given a standard rate of return. When discount rate:

• C. Decreases, the present value of any future cash flow increases.

It is believed that increasing the discount rate of future cash flow decreases its present value. The reverse is also applicable because decreasing the discount rate increases its present value.

To correctly calculate the present value, we need to assume that a specified rate of return will be earned on the money over a span of time.

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