In which of the following situations would it not be appropriate to use the following formula:
PV = C0 + C1/(1 + r) + C2/(1 + r)2 + . . . . + Cn/(1 + r)n
When determining the present value (PV) of a cash flow stream?
A) when yield curves are flat
B) when short-term and long-term interest rates vary widely
C) when the inflation rate is high
D) when the discount rate is high

Question

Quizplus · Accepted Answer

The formula assumes a constant discount rate (r) over the entire period. When short-term and long-term interest rates vary widely, a single discount rate may not accurately reflect the varying rates over time.

In Which of the Following Situations Would It Not Be