When the discount rate increases, the denominator dividing the future cash flow increases; as a result, the present value decreases.
What happens to net present value when discount rate increases?
- The NPV will be lower with greater discount rates, the NFV will be higher with higher discount rates, and the annualized value will be higher or lower depending on the length of time the values are annualized.
- When the discount rate rises, the denominator dividing the future cash flow rises, causing the present value to fall.This is because when the expected interest rate rises, a less amount must be invested today to get the anticipated future income flow.
- The discount rate reduces the present value of future cash flows, hence the greater the discount rate, the lower the present value of future cash flows.A lower discount rate results in a greater present value.As a result, when the discount rate is larger, money will be worth less in the future than it is today.
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