Your broker called earlier today and offered you the opportunity to invest in a security. As a friend, he suggested that you compare the current, or present value, cost of the security and the discounted value of its expected future cash flows before deciding whether or not to invest. The decision rule that should be used to decide whether or not to invest should be:a) Everything else being equal, you should invest if the discounted value of the security's expected future cash flows is less than the current cost of the security. b) Everything else being equal, you should invest if the discounted value of the security's expected future cash flows is greater than or equal to the current cost of the security. c) Everything else being equal, you should invest if the current cost of the security is greater than the present value of the security's expected future cash inflows.

Question

Business

Harper Shelton

27 September, 22:26

Your broker called earlier today and offered you the opportunity to invest in a security. As a friend, he suggested that you compare the current, or present value, cost of the security and the discounted value of its expected future cash flows before deciding whether or not to invest. The decision rule that should be used to decide whether or not to invest should be:a) Everything else being equal, you should invest if the discounted value of the security's expected future cash flows is less than the current cost of the security. b) Everything else being equal, you should invest if the discounted value of the security's expected future cash flows is greater than or equal to the current cost of the security. c) Everything else being equal, you should invest if the current cost of the security is greater than the present value of the security's expected future cash inflows.

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Answers (1)

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Alexander Mata · Answer 1

The correct answer from the options is B

Explanation:

The present value of an expected future cash flows refers to the amount of money an investor considers an investment to be worth today based on the expected cash inflows produced by the investment in the future and a discount rate.

The decision rule that should be used to decide whether or not to invest should be everything else being equal (ceteris paribus), you should invest if the discounted value of the security's expected future cash flows is greater than or equal to the current cost of the security.