Which of the Following Statements Is CORRECT

question 106

Multiple Choice

Which of the following statements is CORRECT?

• A) If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.
• B) If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.
• C) To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.
• D) If you solve for I and get a negative number, then you must have made a mistake.
• E) If CF0 is positive and all the other CFs are negative, then you cannot solve for I.

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Definitions:

Diminishing Marginal Utility

The decrease in satisfaction or usefulness obtained from each additional unit of consumption.

Inferior Good

A type of good for which demand decreases as the income of the consumer increases, due to the availability of more desirable substitutes.

Diminishing Marginal Utility

The principle that as a person consumes more of a good, the satisfaction gained from consuming an additional unit decreases.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than others can produce it. Relative costs determine comparative advantage.