Question

Which one of the following will increase the future value of a stream of unequal payments for a ten year project? The rate of return is positive. Answer is D.

1. Delaying some cash inflows from years 1 and 2 until year 9.
2. Lowering the discount rate applicable to all ten years.
3. Increasing the initial cash outflow to start the project.
4. Moving more of the cash inflows to the earlier years of the project.
5. Lowering the effective annual rate applicable to the project.

Answer 1

Option D is correct: Moving more of the cash inflows to the earlier years of the project. This will result in an increase in the future value of a stream of unequal payments because earlier the cash inflows more the time for compounding.

Option A is incorrect because Delaying some cash inflows from years 1 and 2 until year 9 will result in giving less time for compounding

Option B is incorrect because Lowering the discount rate applicable to all ten years will decrease the future value

Option C is incorrect because Increasing the initial cash outflow to start the project will decrease the future value because the cash outflow is negative

Option E is incorrect because Lowering the effective annual rate applicable to the project will decrease the future value