Why Are the Capital Costs of Long-Term Projects Discounted to Present

question 7

Multiple Choice

Why are the capital costs of long-term projects discounted to present value?

• A) Because money that is received in the future has a greater value than money received now.
• B) To better account for the resource yield that will be foregone by a long-term investment.
• C) Because the amount of money that is spent in interest payments for the project should not be incorporated into the capital budget.
• D) To better account for the relative stability of tax-free government investments as compared to private sector projects.

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Definitions:

Individual Income Tax

A tax levied on the income of individuals or households by the government.

Proportional Tax

A tax system where the tax rate remains constant regardless of the amount subject to taxation.

Marginal Tax Rate

The tax rate that applies to each additional dollar of income, indicating how much of the next dollar earned will be taken in taxes.

Average Tax Rate

Average Tax Rate is the proportion of the total income paid as taxes, calculated by dividing the total taxes by the total taxable income.