Reference: 10-04
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
-Which of the statements below is correct about an increase in the discount rate

Question

Quizplus · Accepted Answer

An increase in the discount rate would increase the discounting factor used to calculate present values, thus reducing the present value of future cash flows. This is because the higher discount rate reflects a higher opportunity cost of capital, meaning that investors would require a higher return to forgo the use of their capital in the present.

Reference: 10-04 The Finney Company Is Reviewing the Possibility of Remodelling One