Question

The present value of $150,000 in annual cash flows given a 10% required rate of return will be:

(a) greater than the present value given a 12% required rate of return.
(b) less than the present value given a 12% required rate of return.
(c) equal to the present value given a 12% required rate of return.
(d) unknown because it depends on the timing of the cash flows.

Will appreciate the steps to solving this question.

Answer 1

The correct option is
(a) greater than the present value given a 12% required rate of return.
Explanation:
The rule is higher the required rate of return lower the present value or
Lower the required rate of return higher the present value
For example, if we calculate present value for given cash flow for 2 years
The present value at 10%
	=$150000/(1+0.10)^1 +$150000/(1+0.10)^2
	$         2,60,331
Whereas present value at 12%
=$150000/(1+0.12)^1 +$150000/(1+0.12)^2
	=$253508
Hence answer (a) is correct.