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:

Tax Burden

The total amount of tax paid by an individual, a household, or an organization relative to their income or profits.

Social Security Benefits

Payments made to eligible individuals by the government, including retirement, disability, and survivor benefits.

Progressive Tax

Places greater burden on those with best ability to pay and little or no burden on the poor (for example, federal personal income tax).

Proportional Tax

A tax whose burden falls equally among the rich, the middle class, and the poor.