Final answer:
The two-year discount factor for an annual interest rate of 12.00% is calculated using the formula DF = 1 / (1 + r)^n, where r is the interest rate and n is the number of years. The discount factor in this case is 0.7972. Option d is correct.
Step-by-step explanation:
You asked about calculating the two-year discount factor for an annual interest rate of 12.00%. The key is to use the formula for the present value of future cash flows. The discount factor is the factor by which you multiply future cash flows to present value them. The formula is DF = 1 / (1 + r)^n, where r is the annual interest rate and n is the number of years.
Therefore, the two-year discount factor for a 12% interest rate is calculated as 1 / (1 + 0.12)^2, which equals approximately 0.7972.
Using this discount factor, you can determine the present value of cash flows that are expected to be received in two years. This concept is crucial when evaluating bonds or any investment where you expect to receive payments in the future.