You Are Trying to Compare the Present Values of Two

question 23

Multiple Choice

You are trying to compare the present values of two separate streams of cash flows which have equivalent risks.One stream is expressed in nominal values and the other stream is expressed in real values.You decide to discount the nominal cash flows using a nominal annual rate of 8 percent.What rate should you use to discount the real cash flows?

• A)8 percent
• B)EAR of 8 percent compounded monthly
• C)comparable risk-free rate
• D)comparable real rate
• E)You cannot compare the present values of these two streams of cash flows.

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Definitions:

Pooled Estimate

A method to estimate a combined variance from two or more groups that assumes the groups have the same variance.

F Test

A statistical test used to determine if there are significant differences between the variances of two or more samples.

Experimental Procedures

Experimental procedures are systematic processes followed in scientific research to test hypotheses by manipulating and controlling variables.

Population Variances

Measures of the dispersion or spread of a set of data points in a population.