Question

Which one of the following will increase the present value of a finite stream of even cash flows? Assume a positive rate of return.

A. Moving every cash flow one time period further into the future

B. Decreasing the amount of each cash flow

C. Increasing the Time 2 cash flow by $100 and lowering the Time 3 cash flow by $100

D. Moving the Time 1 cash inflow to Time 2

E. Increasing the discount rate

Answer 1

Present value = P×(1÷(1+r)^n)

P is Future value

r is interest rate per period

n is number of periods

P, r and n are required for calculating future value.

Hence, correct option will be “C. Increasing the Time 2 cash flow by $100 and lowering the Time 3 cash flow by $100”

Answer 2

E. Increasing the discount rate

When dealing with a finite stream of even cash flows, increasing the discount rate will increase the present value of these cash flows. The discount rate represents the rate of return or the cost of capital used to calculate the present value of future cash flows. As the discount rate increases, the present value of cash flows decreases, and vice versa. Therefore, increasing the discount rate will result in a lower present value, and decreasing the discount rate will result in a higher present value.