Allen Steel Company is considering whether to build a new mill.If the interest rate rises,
A)the present value of the returns from the mill will fall,so Allen will be less likely to build the mill.
B)the present value of the returns from the mill will fall,so Allen will be more likely to build the mill.
C)the present value of the returns from the mill will rise,so Allen will be less likely to build the mill.
D)the present value of the returns from the mill will rise,so Allen will be more likely to build the mill.

Question

Quizplus · Accepted Answer

When the interest rate rises, the present value of future returns from the mill will decrease. This is because higher interest rates increase the discount rate applied to future cash flows, leading to a lower present value. As a result, Allen Steel Company is less likely to decide in favor of building the mill as the returns from the investment would be worth less in today's dollars.

Allen Steel Company Is Considering Whether to Build a New