If the Discount Rate Is Increased from 8% to 10

question 146

Multiple Choice

If the discount rate is increased from 8% to 10%, what will happen to the net present value (NPV) of a project (assume all future cash flows are positive) ?

• A) NPV will always increase.
• B) NPV will always decrease.
• C) The discount rate change will not affect NPV.
• D) We cannot determine the direction of the effect on NPV from the information provided.

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Definitions:

Stockholders

Individuals or entities that own a share or shares of a corporation, thereby having a claim on its assets and earnings.

Marketability

The ease with which an asset can be sold quickly in the market without affecting its price significantly.

Solvency

A measure of a company's ability to meet its long-term financial obligations.

Horizontal Analysis

A financial statement analysis method that compares line items in a statement to those of previous periods to determine changes over time.