Do you think that happened because he used a Lower or Higher discount rate in the second scenario.

Question

When the financial manager made a five years finance study for a future project with an initial investment of $500,000, he made two scenarios based on two different discount rates. The first scenario Net Present Value (NPV) was $250,000, and he second scenario NPV

was $300,000. Do you think that happened because he used a Lower or Higher discount rate in the second scenario.

Answer 1

A lower discount rate was used in the second scenario. It's helpful to think of the discount rate as the opportunity cost of investing in the project. The lower your opportunity cost, the more the project is worth today. Mathematically, the lower discount rate results in a higher NPV because you're dividing your future cash flows by a smaller number.