You plan to analyze the value of a potential investment by calculating the sum of the present values…

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?

Answer

a 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.

b The discount rate increases.

.

c. The discount rate decreases.

d The riskiness of the investment's cash flows decreases.

.

e 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.

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