Suppose That Many Consumers Tend to Over-State the Discount Rate

question 140

Multiple Choice

Suppose that many consumers tend to over-state the discount rate that should be used for computing the net present value of education, just as they do when making investments in durable goods like cars and appliances. What would happen if consumers (as a group) started to use lower discount rates when making decisions about their education?

• A) NPV of a degree declines, demand for eduction declines
• B) NPV of a degree declines, demand for education increases
• C) NPV of a degree increases, demand for education declines
• D) NPV of a degree increases, demand for education increases

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Definitions:

Profitability Indices

Profitability indices are financial tools used to evaluate the efficiency of an investment or to compare the efficiency of multiple projects by calculating the ratio of the present value of future cash flows to the initial investment.

Project Accepted

The status of a project that has been approved for execution after evaluation of its feasibility, returns, and alignment with strategic goals.

Terminal Value

The value of a business or project beyond the forecast period when future cash flows can be estimated.

Non-Normal Cash Flows

Cash flow patterns that do not fit the standard or expected periodic inflow or outflow of funds, often seen in irregular income streams.