Managerial Accounting: Creating Value in a Dynamic Business Environment
12th Edition
ISBN: 9781260417074
Author: HILTON, Ronald
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter II, Problem 4RQ
To determine
Explain the given statement is true or false.
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How should I think about the discount rate in a discounted cash flow model, and what it means (in real life)? And where do I find inputs for the discount rate? How is it calculated?
What is discounting and why do we discount future cash flows?
You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. If the discount rate decreases the it would lower the calculated value of the investment.
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True
False
Chapter II Solutions
Managerial Accounting: Creating Value in a Dynamic Business Environment
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- Which of the following discounts future cash flows to their present value at the expected rate of return, and compares that to the Initial Investment? A. internal rate of return (IRR) method B. net present value (N PV) C. discounted cash flow model D. future value methodarrow_forwardThe discounted payback method considers the time value of money as well as the cash flows after the payback.Group of answer choices A.false B. truearrow_forwardWhat are: the payback method, the Accounting Rate of Return, and Discounted Cash Flow Model (Net Present Value and Internal Rate of Return)arrow_forward
- Why is it true that a reinvestment rate is implicitly assumed whenever we find thepresent value of a future cash flow? Would it be possible to find the PV of a FV withoutspecifying an implicit reinvestment rate?arrow_forwardWhat do you understand by the present value of money? Group of answer choices A. Amount borrowed or deposited B. Maximum that can be deposited C. Sum of deposit and interest D. Another name for the futurearrow_forwardWhat is an opportunity cost rate?How is this rate used in discounted cash flow analysis? Is the opportunity rate a single number that is used to evaluate all potential investments?arrow_forward
- What is the difference between Cash Flow Risk and Interest Rate Risk? Please explain it clearly so that I can easily understand. Thank you.arrow_forwardWhich figure of merit provides an interest rate at which the present value of the future cash flows equals the amount invested? a) NPV b) IRR c) Cap Rate d) DCF Please ensure accuracy and explain your choicearrow_forward3. Describe the Discounted Cash Flow Method. How is this value determined, and what are the assumptions/limitations?arrow_forward
- An increase in the discount rate will____ a. Reduce the present value of future cash flows b. Increase the present value of future cash flows c. Have no effect on net present value d. Compensate for reduced riskarrow_forwardWhat is the process of solving a cash flow for an unknown interest rate?arrow_forwardBriefly explain the following; a. present value of money. b. future value of money.arrow_forward
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