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:

Accrued Revenues

Revenues that have been earned but not yet received in cash or recorded, representing assets on the balance sheet.

Cash Received

The amount of money that an entity collects, typically from operating activities such as sales of goods or services.

Liability Recorded

Recording a business's liabilities or money owed in its financial statements.

Prepaid Expenses

Expenses paid in advance for goods or services, which are recorded as assets on a balance sheet until they are consumed or used.