2. You are analyzing a potential investment. The investment is structured as fol

Question

2. You are analyzing a potential investment. The investment is structured as follows: you pay a lump sum up front, and receive a series of payments of equal amounts in the future. Which of the following would make the investment more appealing? Assume that your discount rate is greater than zero. Assume that in each case (a, b, c, and d), only the factors mentioned change, but that all else remains constant. a. The discount rate increases but the payment pattern remains unchanged. b. The total amount of the cash flows you receive remains the same, but the cash flows are paid out over a longer time period. c. The discount rate decreases, but the cost of the investment (the payment up front at t=0) remains unchanged. d. Answers a and b above are both correct. e. None of the above are correct.

Explanation / Answer

c. The discount rate decreases, but the cost of the investment (the payment up front at t=0) remains unchanged.

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