An increase in the risk associated with a future stream of cash should result in an increase in the discount rate used in the present value calculation.

Question

Quizplus · Accepted Answer

The higher the risk associated with a future stream of cash flows, the higher the required rate of return or discount rate should be. This is because investors will require a higher return to compensate them for taking on more risk. Therefore, an increase in risk should result in an increase in the discount rate used in the present value calculation.

An Increase in the Risk Associated with a Future Stream