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:

Fair Value

An estimated market value of an asset or liability based on current market prices or valuations of similar instruments.

Mortgage

A loan secured by real property, typically paid back with interest over a long period, used by individuals and businesses to purchase real estate.

Allowance Account

An account used in accounting to record reductions in the carrying amount of accounts receivable, due to potential or estimated uncollectible debts.

Net Realizable Value

The estimated selling price in the ordinary course of business minus the estimated costs of completion and the estimated costs necessary to make the sale.