BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Decrease the interest rate.
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Decrease the future value.
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Decrease the amount of time.
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All of the above will decrease the present value.
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Detailed explanation-1: -Which of the following actions will DECREASE the present value of an investment? Decrease the interest rate.
Detailed explanation-2: -The answer is: d. So the three variables that could lower the present value are a higher rate of interest (higher discount rate), a lower future value, or a shorter time period.
Detailed explanation-3: -The lower the discount rate, the higher would be the present value of future cash flows.
Detailed explanation-4: -The major components that influence the present value are the interest rate, the period, and the cash flow. Investors should account for inflation by using the real rate of return (nominal interest rate the rate of inflation).
Detailed explanation-5: -The present value of a future lump sum decreases as the discount rate used decreases, all else held constant. The present value and discount rate are inversely related. If the future value and the number of periods are held constant the present value will decrease as the discount rate increases.