Suppose You Are Trying to Find the Present Value of Two

question 120

Multiple Choice

Suppose you are trying to find the present value of two different cash flows using the same interest rate for each. One cash flow is $1,000 ten years from now, the other $800 seven years from now. Which of the following is true about the discount factors used in these valuations?

• A) The discount factor for the cash flow ten years away is always less than or equal to the discount factor for the cash flow that is received seven years from now.
• B) Both discount factors are greater than one.
• C) Regardless of the interest rate, the discount factors are such that the present value of the $1,000 will always be greater than the present value of the $800.
• D) Since the payments are different, no statement can be made regarding the discount factors.
• E) You should factor in the time differential and choose the payment that arrives the soonest.

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Definitions:

Local Phone Company

A telecommunications provider that offers services within a specific geographic area, typically handling local calls and access.

Monopolistic Competitor

A firm that operates in a market structure characterized by many competitors offering products or services that are similar but not identical, allowing for some degree of market power.

Long Run

A period in which all factors of production and costs are variable, allowing for full adjustment to changes.

Excess Capacity

Excess Capacity refers to a situation where a company can produce more goods than the market demands, often leading to unused resources.