What Effect Will an Increase in the Discount Rate Have

question 57

Multiple Choice

What effect will an increase in the discount rate have on the present value of a project that has an initial cash outflow followed by five years of cash inflows?

• A)There will be no effect on the PV.
• B)The PV will change but the direction of the change is unknown.
• C)The PV will remain the same as the timing of the cash flows must change also.
• D)The PV will increase.
• E)The PV will decrease.

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Definitions:

Present Discounted Value

The current worth of a future sum of money or stream of cash flows, given a specified rate of return or discount rate.

Expected Profits

The anticipated earnings from an investment or business venture, taking into account factors like revenue, costs, and risk.

Interest Rate

The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. It is calculated on an annual basis, known as the annual percentage rate (APR).

Management by Exception

A management strategy where supervisors intervene only when their subordinates' performance deviates significantly from standards, allowing managers to focus on more critical issues.