You Plan to Analyze the Value of a Potential Investment

question 36

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

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Definitions:

Frustration

Interference with a contract by some outside, unforeseen event that makes performance impossible or essentially different in nature.

Equitable Remedy

A judicial order enforcing a party to act or refrain from acting in a certain way, used when monetary compensation does not suffice to resolve a legal dispute.

Frustration Clause

A frustration clause in a contract is a provision that releases both parties from their obligations if an unforeseeable event occurs, making it impossible to fulfill the contract.

Tomato Crop

Refers to the cultivation and production of tomatoes as an agricultural activity.