The Present Value of the Following Cash Flows Is Known

question 112

Multiple Choice

The present value of the following cash flows is known to be $6,939.91; $500 today, $2,000 in one year, and $5,000 in two years.What discount rate is being used?

• A)3 percent
• B)4 percent
• C)5 percent
• D)6 percent $6,939.91 = $500/(1 + i)⁰ + $2,000/(1 + i)¹ + $5,000/(1 + i)²

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Definitions:

Income

Money that an individual or business receives in exchange for providing labor, producing goods, or investing capital, over a certain period.

Utility Function

A mathematical representation that translates the satisfaction or happiness a consumer gains from consuming quantities of goods and services into a numerical value.

Consumer's Surplus

The difference between what consumers are willing to pay for a good or service and what they actually pay.

Earplugs

Devices inserted in the ear canal to protect the ears from loud noises, water, foreign bodies, or excessive wind.