You Plan to Analyze the Value of a Potential Investment

question 13

Multiple Choice

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?

• A) 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.
• B) The discount rate increases.
• C) The riskiness of the investment's cash flows decreases.
• D) 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.
• E) The discount rate decreases.

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Definitions:

Inventory Turnover

A measure illustrating the frequency at which a firm's stock is sold and replenished within a specific timeframe, showcasing the effectiveness of managing inventory.

Low Ratio

A financial metric that indicates a ratio lower than industry norms, often suggesting less risk or lower performance in certain contexts.

IRS Guidelines

The rules and regulations issued by the Internal Revenue Service governing the tax process in the United States.

FIFO

First-In, First-Out, an inventory valuation method where the first items purchased are the first ones to be sold, impacting the cost of goods sold and inventory on the balance sheet.