Steve Is Offered an Investment Where for Every $1

question 23

Multiple Choice

Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the next five years. Steve concludes that in five years he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steve's major error in reasoning when making this decision?

• A) He ignores the fact that the costs and benefits of the investment are not stated in the same terms.
• B) He ignores the benefits of consuming the $1.00 today against the benefits of consuming the $1.00 five years from now.
• C) He fails to consider the costs of not consuming the $1.00 today.
• D) He considers that the value of the cash he may have in the future is the same as the value of cash he has today.

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Definitions:

Profit Margin

A financial metric that measures the amount of net income earned with each dollar of sales by calculating the percentage of revenue that exceeds the cost of goods sold.

Net Income

The net income of a company, which is the remaining amount after deducting all costs and taxes from the total revenue.

Sales

The revenue a company earns from selling goods or services in its normal operations.

Operating Expenses

Costs associated with running a business's core operations on a daily basis, excluding costs of goods sold.