Question

A company that produces baseball gloves is considering buying some new equipment that it expects will increase future profits. If the interest rate rises, then the present value of these future profits Group of answer choices rises. The company is more likely to buy the equipment. rises. The company is less likely to buy the equipment. falls. The company is more likely to buy the equipment. falls. The company is less likely to buy the equipment. None of the options is correct.

Answer 1

Answer:

falls, the company is less likely to buy the equipment

Explanation:

There is an inverse relationship between interest or discount rate and present values of an investment,in that a higher interest rates brings about lower present values and vice versa.

Higher interest rate means that the cost of borrowing to fund the purchase of equipment is high, hence less profitable as the impact of  higher interest expense on the income statement is a lower net income.

As a result, the company is less likely to go ahead with the planned purchase as the investment from a funding perspective is value-maximizing.