Final answer:
The student's statement is false. In present value analysis, as the discount rate increases, the present value of a future cash inflow decreases, not increases. This is because the future cash flow is discounted more heavily at a higher rate, reflecting that future money is worth less in present terms.
Step-by-step explanation:
The statement in question is about present value analysis, which is a financial concept used to determine the current worth of a cash flow that is to be received in the future. When conducting present value analysis, the future cash inflow is 'discounted' to account for the time value of money. The time value of money is the principle that money available now is worth more than the same amount in the future due to its potential earning capacity. This principle implies that money can earn interest, so every dollar received today can be invested to earn additional dollars in the future.
When it comes to the relationship between the present value and the discount rate, the answer to the student's question is false. As the discount rate increases, the present value of a given future cash inflow actually decreases. This is because a higher discount rate means that future cash flows are being discounted more heavily, reflecting the principle that money in the future is worth less today.
An example would be the valuation of a bond. If the interest rate (which is used as the discount rate in bond valuation) increases from 8% to 11%, the present value of the bond's future cash payments would decrease. This is because the same payments in the future are now worth less in today's dollars when discounted at the higher rate of 11%. This would also affect the market value of the bond, as a potential buyer would pay less for the bond knowing that the yields (interest rates) in the market have risen.
Similarly, the concept of present value is not exclusive to finance. It is widely used in various scenarios, such as evaluating capital investments in a business or government decisions on infrastructure. The present discounted value must be considered when weighing the present costs against the future benefits of any investment.