You Plan to Analyze the Value of a Potential Investment

question 63

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

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Definitions:

Standard Deviation

It measures the dispersion or spread of a data set, indicating how much the values in the set deviate from the mean on average.

Postformal Thought

A proposed adult stage of cognitive development, following Piaget’s four stages, that goes beyond adolescent thinking by being more practical, more flexible, and more dialectical (i.e., more capable of combining contradictory elements into a comprehensive whole).

Operational Thought

A stage in Piaget's theory of cognitive development where children develop the ability to think logically about abstract concepts.

Concrete Thought

Thinking that is literal and focused on the physical world, often observed in early cognitive development.