Which of the following affects the present value of an investment?

• A. The interest rate used for discounting
• B. The number of shares outstanding
• C. The market value of inventory
• D. The company's net income

Answer: (A)

Verified step by step guidance

1. Understand the concept of present value: Present value is the current worth of a future sum of money or stream of cash flows, given a specified rate of return. It is calculated using the discounting process, which adjusts future cash flows for the time value of money.
2. Identify the key factor affecting present value: The interest rate used for discounting is the primary factor that influences the present value. A higher interest rate reduces the present value, while a lower interest rate increases it. This is because the discounting process adjusts future cash flows based on the rate of return.
3. Eliminate irrelevant options: The number of shares outstanding, the market value of inventory, and the company's net income do not directly affect the calculation of present value. These factors are related to other aspects of financial analysis, such as equity valuation or operational performance.
4. Relate the interest rate to the formula: The formula for present value is \( PV = \frac{FV}{(1 + r)^n} \), where \( PV \) is the present value, \( FV \) is the future value, \( r \) is the interest rate (discount rate), and \( n \) is the number of periods. The interest rate \( r \) directly impacts the denominator, thereby affecting the present value.
5. Conclude the reasoning: Since the interest rate used for discounting is the only factor among the options that directly influences the present value calculation, it is the correct answer to the question.