You Are Considering a Project That Has Been Assigned a Discount

question 5

Multiple Choice

You are considering a project that has been assigned a discount rate of 12 percent.If you start the project today,you will incur an initial cost of $280 and will receive cash inflows of $350 a year for 3 years.If you wait 1 year to start the project,the initial cost will rise to $420 and the cash flows will increase to $385 a year for 3 years.What is the value of the option to wait?

• A)-$110.01
• B)-$55.93
• C)$18.67
• D)-$20.20
• E)$20.20

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Definitions:

Law of Effect

A psychological principle stating that responses followed by a satisfying effect become more likely to occur, while responses followed by a discomforting effect become less likely.

Thorndike

An American psychologist known for his work on learning theory and the law of effect, which suggested that behaviors followed by satisfying outcomes are likely to be repeated.

Stimulus

Any event or situation that evokes a response from an organism.

Systematic Desensitization

A behavioral therapy technique used to reduce phobic responses or anxiety through gradual exposure to the feared object or situation coupled with relaxation exercises.