Moral Hazard Occurs When Buyers and Sellers Take Actions to Communicate

question 118

True/False

Moral hazard occurs when buyers and sellers take actions to communicate quality in a world of uncertainty.

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Definitions:

Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows over a period of time, used in capital budgeting to analyze the profitability of an investment.

Profitability Index

A financial tool used to evaluate the desirability of an investment, calculated as the present value of future cash flows divided by the initial investment.

Net Cash Flow

The variance between the cash coming into and going out of a business within a given timeframe.

Discount Rate

The interest rate used to discount future cash flows to their present value, enabling comparison of the value of investments made at different times.