You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true?
A)The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.
B)The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B.
C)The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B.
D)No comparison can be made - we need to know the cash flows to calculate the present value.

Question

Quizplus · Accepted Answer

The present value of future cash flows decreases as the discount rate increases. Since Investment A has a lower discount rate (4%) compared to Investment B (5%), the present value of Investment A's cash flows will be higher than that of Investment B.

You Are Given Two Choices of Investments, Investment a and Investment