Your broker called earlier today and offered you the opportunity to invest in a security. As a friend, he suggested that you compare the current, or present value, cost of the security and the discounted value of its expected future cash flows before deciding whether or not to invest. The decision rule that should be used to decide whether or not to invest should be:a) Everything else being equal, you should invest if the discounted value of the security's expected future cash flows is less than the current cost of the security.b) Everything else being equal, you should invest if the discounted value of the security's expected future cash flows is greater than or equal to the current cost of the security.c) Everything else being equal, you should invest if the current cost of the security is greater than the present value of the security's expected future cash inflows.

The present value of an expected future cash flows refers to the amount of money an investor considers an investment to be worth today based on the expected cash inflows produced by the investment in the future and a discount rate.

The decision rule that should be used to decide whether or not to invest should be everything else being equal (ceteris paribus), you should invest if the discounted value of the security's expected future cash flows is greater than or equal to the current cost of the security.

abdulmajeedabiodunac abdulmajeedabiodunac · Answer 2 · 2020-03-27T16:29:26+01:00

Answer:

The correct option is B

Explanation:

From an opportunity cost point of view, that is the rate of return that could be earned elsewhere if the investment in the security is ignored,option A which has lower present value implies that the discount rate used(opportunity cost) in discounting the future cash flows is higher than the rate of return on the security itself,then it is worthwhile investing elsewhere.

Option B shows that the rate of return obtainable elsewhere is the same as the one receivable from the security at hand, hence sticking to the one at hand is fine.

Option C implies that the security is loss making since the cost of the security is even higher than the future cash flows discounted to today's terms.