Question

Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 65 percent of the company's overall sales. Division A is also the riskier of the two divisions. When management is deciding which of the various divisional projects should be accepted, the managers should __________

Answer 1

Answer:

The correct answer is D. Assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.

Explanation:

The discount rate is the cost of capital that is applied to determine the current value of a future payment.

The discount rate is used to "discount" future money. It is widely used when evaluating investment projects. It tells us how much money is worth now from a future date.

The discount rate is the inverse of the interest rate, which serves to increase the value (or add interest) in the present money. The discount rate, on the other hand, detracts from the future money when it is transferred to the present, except if the discount rate is negative, in case it will mean that the future money is worth more than the current one. The interest rate is used to obtain the increase to an original amount, while the discount rate is subtracted from an expected amount to obtain an amount in the present.

Except in exceptional cases, the discount rate is positive because before the promise of receiving money in the future we have the uncertainty of whether we will receive it or not, since there may be a problem that prevents us from receiving that money. Therefore, the farther the money we are going to receive, the less it will be worth now.