The volatility of interest rates affect the value of the project by:
A)increasing the value as volatility increase.
B)increasing the value as volatility decrease.
C)decreasing the value as volatility increase.
D)interest rate volatility does not affect value.
E)None of the above.

Question

Quizplus · Accepted Answer

CInterest rate volatility can affect the value of a project in both directions. An increase in volatility can increase the value of projects with options (e.g., the option to delay, expand, or abandon), as it may provide more opportunities to adapt to favorable conditions. Conversely, it can decrease the value by increasing the risk and the discount rate used in present value calculations, making future cash flows less valuable.

The Volatility of Interest Rates Affect the Value of the Project