If the discount rate increases

Question

Quizplus · Accepted Answer

When the discount rate increases, the present value of future cash flows decreases, thus causing the NPV to fall. This occurs because the discount rate represents the opportunity cost of not investing in other projects that offer higher potential returns. An increase in the discount rate indicates that the required rate of return for the investment has increased, making it less attractive as an investment option. Therefore, a higher discount rate reduces the present value of future cash flows and lowers the NPV.

If the Discount Rate Increases