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Cash Flow Discount Method: True/False Quiz

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Questions and Answers

What is the primary reason why future cash flows are discounted in the cash flow discount method?

To account for operational expenses
To reflect the potential for future cash flows to increase
Because money received in the future is generally considered less valuable than money received today (correct)
To account for the time value of money in the future

Which of the following is NOT a factor considered in the discount rate in the cash flow discount method?

Risk
Inflation
Property appreciation (correct)
Opportunity cost

What types of expenses are typically included in the cash flow discount method?

Only rental income and lease payments
Operating costs, maintenance expenses, taxes, and insurance (correct)
Only property taxes and insurance
Only operating costs and maintenance expenses

How does an increase in the risk associated with a property investment affect the discount rate in the cash flow discount method?

It results in a higher discount rate (C) Signup and view all the answers

What is the purpose of discounting future cash flows in the cash flow discount method?

To determine the present value of future cash flows (B) Signup and view all the answers

What is the effect of a higher discount rate on the present value of future cash flows in the cash flow discount method?

The present value of future cash flows decreases (D) Signup and view all the answers

What is the primary purpose of terminal value in business valuation?

To determine the value of a business or project beyond the forecast period (B) Signup and view all the answers

What is the time frame considered in determining terminal value?

The time period beyond the forecast period (C) Signup and view all the answers

What is the significance of terminal value in investment decisions?

It determines the overall value of a business or project (C) Signup and view all the answers

What is the relationship between terminal value and cash flow estimation?

Terminal value is estimated beyond the period for which cash flows can be reasonably forecast (C) Signup and view all the answers

Why is terminal value important in business valuation?

It recognizes the value of a business or project beyond the forecast period (C) Signup and view all the answers

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