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A student is calculating the present value of a $1,000 payment they will receive in 5 years, using a 10% annual discount rate. They perform the following calculation: $1,000 x (1.10)^5 = $1,610.51, and conclude the money is worth more today than in the future. What is the primary conceptual error in the student's approach?
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CORE Econ
Economics
Social Science
Empirical Science
Science
Economy
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.9 Lenders and borrowers and differences in wealth - The Economy 2.0 Microeconomics @ CORE Econ
Analysis in Bloom's Taxonomy
Cognitive Psychology
Psychology
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Activity: Evaluating Statements on Present Value
Analyze each scenario and match it to the institutional concept it best exemplifies. Note that some concepts may be used more than once.
A recent graduate is offered a signing bonus for a new job with two payment options. Option A is to receive $5,000 immediately. Option B is to receive $5,500 in exactly two years. If the graduate's personal annual discount rate is 8%, which option has a higher present value and is therefore the financially superior choice?
Calculating the Present Value of a Future Prize
An investment promises a guaranteed payout of $10,000 in exactly five years. Four different investors are evaluating this opportunity, each with a different personal annual discount rate reflecting their individual valuation of future money. Which investor will calculate the lowest present value for this future payout?
An investment promises a guaranteed payout of $10,000 in exactly five years. Four different investors are evaluating this opportunity, each with a different personal annual discount rate reflecting their individual valuation of future money. Which investor will calculate the lowest present value for this future payout?
Holding the annual discount rate constant, the present value of a $1,000 payment to be received in 5 years is greater than the present value of the same $1,000 payment to be received in 10 years.
Investment Decision for a Small Business
A student is calculating the present value of a $1,000 payment they will receive in 5 years, using a 10% annual discount rate. They perform the following calculation: $1,000 x (1.10)^5 = $1,610.51, and conclude the money is worth more today than in the future. What is the primary conceptual error in the student's approach?
A company is evaluating two potential investments. Investment A will yield a guaranteed return of $50,000 in 3 years. Investment B will yield the same guaranteed return of $50,000, but in 7 years. How will an increase in the annual discount rate affect the calculated present value of these two investments?
To find the present value of a future sum of money, you must apply a series of calculations using the future value, the number of time periods, and the discount rate. Arrange the following mathematical operations in the correct sequence.