You Plan to Analyze the Value of a Potential Investment

question 16

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 increase 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 10 years rather than 5 years,hence that each payment is for $10,000 rather than for $20,000.
• B) The discount rate decreases.
• C) The riskiness of the investment's cash flows increases.
• D) 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.
• E) The discount rate increases.

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Definitions:

Salvage Value

The estimated resale value of an asset at the end of its useful life, considered in depreciation calculations and asset disposal decisions.

Annual Net Cash Flows

The total amount of cash that a company generates or loses over one year, after all expenses and incomes are taken into account.

Depreciated

A reduction in the value of an asset over time, often due to wear and tear or obsolescence, which is accounted for in accounting to spread the cost over its useful life.

Marginal Tax Rate

The marginal tax rate is the rate at which the last dollar of income is taxed, reflecting the rate applied to an individual's or entity's highest level of income.