Question

Discounted cash flow valuation is based upon the notion that the value of an asset is the present value of the expected cash flows on that asset, discounted at a rate that reflects the riskiness of those cash flows. Specify whether the following statements about discounted cash flow valuation are true or false, assuming that all variables are constant except for the variable discussed below:

As the discount rate increases, the value of an asset increases.

As the expected growth rate in cash flows increases, the value of an asset increases.

As the life of an asset is lengthened, the value of that asset increases.

As the uncertainty about the expected cash flows increases, the value of an asset increases.

An asset with an infinite life (i.e., it is expected to last forever) will have an infinite value.

Answer 1

A. False. The reverse is generally true.

B. True. The value of an asset is an increasing function of its cash flows.

C. True. The value of an asset is an increasing function of its life.

D. False. Generally, the greater the uncertainty, the lower is the value of an asset.

E. False. The present value effect will translate the value of an asset from infinite to finite terms.

#Let me know in the comments if you need more clarification on any point.

Hope this helps :)