Ceterus Paribus, if we reduce the rate of discounting, the present value will:2 pointsFallRiseRemain sameNeed more information
Question
Ceterus Paribus, if we reduce the rate of discounting, the present value will:
- Fall
- Rise
- Remain same
- Need more information
Solution
The present value will rise.
Here's why:
"Ceteris Paribus" is a Latin phrase that means "all other things being equal." So, if all other factors remain constant and we reduce the rate of discounting, the present value of future cash flows will increase.
This is because the discount rate and the present value have an inverse relationship. When the discount rate (or interest rate) is high, the present value is low, and vice versa.
So, when we reduce the discount rate, we are decreasing the amount by which we discount future cash flows back to their present value. This makes the present value of those cash flows higher.
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