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Question

In case a company considers a discounting factor higher than the cost of capital for arriving at present values, the present values of cash inflows will be:

A Less than those computed on the basis of cost of capital Correct Answer Incorrect Answer
B More than those computed on the basis of cost of capital Correct Answer Incorrect Answer
C Equal to those computed on the basis of the cost of capital Correct Answer Incorrect Answer
D Both 1 and 2 Correct Answer Incorrect Answer
E None of the above Correct Answer Incorrect Answer

Solution

If a company uses a discounting factor higher than the cost of capital for arriving at present values, it means that they are applying a higher rate of discount to the cash inflows. This will result in lower present values of the cash inflows as compared to those computed on the basis of the cost of capital.

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