Discounted Cash Flow Analysis
A farmer invests $5,000 in sustainable practices that are expected to generate annual savings of $600 for 15 years. Using an annual discount rate of 5%, all of the following statements concerning a discounted cash flow analysis of this investment are correct EXCEPT:
A
The present value of the annual savings can be calculated using the formula .
B
A net present value analysis can indicate whether the sustainable practices investment is financially viable.
C
Discounting accounts for the time value of money by reducing the worth of future savings relative to current dollars.
D
The total discounted savings will be greater than the nominal sum of $9000 because discounting increases the value of future cash flows.
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