You Plan to Analyze the Value of a Potential Investment

question 73

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:

Latent Defects

Hidden or concealed flaws in property or goods that are not readily observable or discoverable through reasonable inspection.

Variable Rate Mortgage

A type of mortgage where the interest rate can change, based on an index or an agreement between the lender and borrower.

Mortgage Reform and Anti-Predatory Lending Act

A legislative act aimed at curbing predatory lending practices in the mortgage industry, ensuring fair and transparent loan terms for borrowers.

Truth-in-Lending Act

Legislation from the federal government in the United States intended to support the well-informed utilization of consumer credit by mandating the disclosure of its conditions and costs.