Q: The discount rate we use in calculating the net present value of the expected future cash flows associated with the new product venture should: (more than one answer could be correct)
or
Q: When determining the net present value of the anticipated future cash flows related to the new product venture, the discount rate we choose should be: (more than one solution might be right)
- Be higher if the initial start-up costs of the venture are higher
- Reflect the opportunity cost of using capital in our next best use
- Be lower for riskier ventures
- Be higher if we expect inflation to be higher
Explanation: The discount rate should account for the returns we could have earned from the next best investment opportunity, representing the opportunity cost of capital. Inflation erodes the value of future cash flows, so a higher discount rate is necessary to reflect that reduced purchasing power.
