Jake borrows $2,000 from Sally on January 1, 2014 and promises to repay Sally on
ID: 1204617 • Letter: J
Question
Jake borrows $2,000 from Sally on January 1, 2014 and promises to repay Sally on December 31, 2019, a payment that will result in Sally earning an annual interest rate of 8%. Which of the following expressions correctly states the value of Jake's payment on December 31, 2013?
A. ($2,000)(1 + 0.08)5
B.
C. ($2,000) / (1 + 0.08)5
D. ($2,000)(1 + .08)
The concept of present value gives decision makers all of the following advantages EXCEPT to:
A. simplify any cost-benefit analysis by always assuming that any costs associated with a project are incurred before benefits are realized.
B. evaluate a project as if all relevant costs and benefits were occurring today rather than at different times.
C. factor out the complication created by time.
D.
compare the value of a dollar realized today with the value of a dollar realized later
($2,000)(1 + 0.08) + ($2,000)(1 + 0.08)2 + ($2,000)(1 + 0.08)3 + ($2,000)(1 + 0.08)4 + ($2,000)(1 + 0.08)5Explanation / Answer
Answer 1:
Option C. Present value = Future Value / (1 + discount rate)^ n , here future value = $2000, Interest rate = 8 per cent and n = 65 years.
Answer 2:
Option A. It bassumes the cost incured and benefits realized are at the same time.
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