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F. Naz, Chartered Accountant

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If the Fed decides to raise interest rates next year, what

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If the Fed decides to raise interest rates next year, what effect would rising rates have upon the following: (1) Consumer financing for big-ticket items such as autos and homes; (2) the present and future values of annuities; (3) the NPV calculation; (4) the WACC; (5) corporate earnings ?

As the increased interest rate will increase the cost of consumer financing therefore the consumer financing may decline. The present value of future cash flows will decline and the future value of today’s investment will go up as the annuities will be compounded at higher rates. As the present value will decline, the NPV will also decline due to increase cost of capital, which is used to discount the future cash flows. As cost of capital will increase therefore the WACC will increase which will reduce the present value and the NPV of the project. As the interest expense will increase therefore the corporate earnings may decline.

Cite the numeric effect upon the NPV, and then explain its rationale and its significance. Could you this is the kind of "numeric illustration"that you should provide for each of the five topic sections?

Customer:replied 6 years ago.

Forgot this scenario maybe it would help...

During the Carter administration, long-term US Treasury yields exceeded 15%, and short-term T-Bills yielded near 20%. After Reagan's inauguration, interest rates began to fall as Fed Chairman Volcker's restrictive monetary policy succeeded in containing inflation. Over the past 25 years, US rates have steadily declined: T-Bills are hovering under 1% and the long bond is yielding about 4%.