Final answer:
The correct statement is b) The present value formula considers the time value of money for each cash flow. This formula adjusts each future cash flow to its present value using an interest rate, demonstrating the principle of time value of money.
Step-by-step explanation:
The correct statement regarding the present value of multiple cash flows formula is: b) The present value formula considers the time value of money for each cash flow. When calculating the present value of multiple cash flows, the formula takes into account the time value of money by discounting each cash flow back to its present value using a specified interest rate. This is done by applying the present value formula to each individual cash flow.
Consider an investment with cash flows across different time periods. The present value of these cash flows is determined by discounting them back to the present using a specific interest rate, which reflects the principles of the time value of money. For instance, with a 15% interest rate, the future cash flow is less valuable than the same amount in the present because of the potential interest that could be earned over time.
Additionally, the present value will decrease if the interest rate increases, as seen when the rate changes from 8% to 11%. Even though the future cash flows remain the same, their present value diminishes as the discount rate becomes higher, which would affect an investor's decision, especially if they intend to sell a bond before its maturity.