A decrease in the discount rate:
A)will increase present values of future cash flows.
B)is one way to compensate for greater risk in a project.
C)will reduce present values of future cash flows.
D)responses a and b are both correct.

Question

Quizplus · Accepted Answer

A decrease in the discount rate will decrease the cost of capital, which in turn will increase the present value of future cash flows. This is because the lower discount rate makes future cash flows more valuable today. Option B is not correct, as a decrease in the discount rate indicates a lower perceived risk in the project, not a compensatory measure for it.

A Decrease in the Discount Rate