Question
Question 11 Which of the following statem is is true? Select the correct answer from the options below The rate of interest , which is used in the calculation of net present value, is referred to as the discount rate / factor The rate of interest , which is used in the calculation of net present value, is called the compound interest The rate of interest used in the calculation of net present value is called the annual interest rate The rate of interest used in calculation of net present value is called the coupon rate.
Answer
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Thea
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Answer
The rate of interest, which is used in the calculation of net present value, is referred to as the discount rate / factor.
Explanation
## Step 1:This questions involves understanding of Net Present Value (NPV), a concept in economics and finance related to the time value of money. The goal is to determine the appropriate term used to refer to the rate of interest in NPV calculations.## Step 2:The Net Present Value (NPV) in economics and finance is the sum of present values of individual cash flows of a series. The time value of money basically states that the value of money varies in time depending on aspects including investment return and risk profile. The NPV is extensively used in finance for comparing the profitability of different investments.## Step 3:When calculating the Net Present Value, we use a particular interest rate to discount future cash flows to present values. This discount rate reflects the premises including the opportunity cost and risk associated with future cash flows. For that reason, disregarding what you call to this probably should be called the discount rate / factor. The Compound Interest, Annual Interest Rate, and Coupon Rate are not the terms usually used in NPV calculations.### Formulas:When looking at NPV, it generally has the form \( NPV = \frac{CF1}{(1+ r)^1} + \frac{CF2}{(1+ r)^2} + ... + \frac{CFn}{(1+ r)^n} - Initial\_Investment \)Where, r is the discount rate and CF are future cash flows.