Asked by disney. dreams on Jun 27, 2024
Verified
Tomʹs Donuts can invest in a new espresso machine that costs $500 and will yield expected profits of $350 each year for two years. At higher interest rates, the present discounted value of profits from the investment
A) increases.
B) decreases.
C) is unchanged.
D) is indeterminate from the given information.
Present Discounted Value
The present worth of a future amount of money or sequence of cash flows, calculated using a given interest rate.
Interest Rates
The cost of borrowing money, typically expressed as a percentage of the amount borrowed, charged by lenders to borrowers.
Expected Profits
The forecasted profit a business anticipates earning over a certain period, based on estimates of future revenues and costs.
- Learn the association between interest rates and the current value of anticipated cash flows, adjusted for discounting.
Verified Answer
DM
Daivik MishraJun 29, 2024
Final Answer :
B
Explanation :
At higher interest rates, the present discounted value of profits decreases because the future profits are discounted back to their present value at a higher rate, making them worth less in today's dollars.
Learning Objectives
- Learn the association between interest rates and the current value of anticipated cash flows, adjusted for discounting.