You Are Given Two Choices of Investments, Investment a and Investment

question 7

Multiple Choice

You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true?

• A)The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.
• B)The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B.
• C)The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B.
• D)No comparison can be made - we need to know the cash flows to calculate the present value.

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Definitions:

Circular Flow Model

An economic model that illustrates the flow of goods and services and money between sectors of the economy.

Income

The monetary payment received for goods or services, or the profit earned on investments, over a period of time, which can influence economic behavior and standard of living.

Command Economy

An economic system where the government or a central authority makes all decisions regarding the production and distribution of goods and services.

Market Economy

An economic system in which supply and demand from consumers primarily control the production and distribution of goods and services.