Effects of interest rates on the firm’s ability to invest Essay (Essay Sample)

Federal Reserve lowers interest rate: Effects of interest rates on the firm’s ability to invest
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Introduction
Capital budgeting decision tools are techniques used to make a series of analyses to assist in choosing the best project. The managers of the firm use these capital budgeting techniques to know which plan will add value to the firm based on financial data.
Through the action of the Federal Reserve, lowering the interest rate will as well affect the discount rate. Therefore, this will affect the cost of capital for a company to invest in. There is a relationship between interest rates and capital budgeting techniques. Some of these techniques are as discussed below.
The firm’s project Net Present Value (NPV) is considered an estimate of the corporate project value in terms of future cash flows and the Weighted Average Cost of Capital. In cases of lower WACC, the expected cash flow will be discounted at a lower rate and therefore, increase the NPV. With a decrease in interest rate, the discount rate will decrease, thus increasing the NPV of the firm project. Projects with higher NPV values are preferred.