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Chapter 4: Q15BP (page 442)

Fill in the following table from Appendix B. Does a high discount rate have a greater or lesser effect on long-term inflows compared to recent ones?

Discount Rate

Years 5% 20%

1 ............. ...............

10 ............. ...............

20 .............. ..............

Short Answer

Expert verified

High discount rate i.e 20% have a higher effect on long term inflows i.e., 20 years. The Present value factor for 20% rate for 20 years is 0.026.

Step by step solution

01

Effect of the discount rate-

A lower discount rate prompts to a higher present value. As this suggests, money in the future will be worth less than it is today when the discount rate is higher.

02

Determining discount rate-

Discount rate

Year

5%

20%

1

0.952

0.833

10

0.614

0.162

20

0.377

0.026

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