Chapter 5R, Problem 12MCQ

To determine

The correct option that defines the present value of $1.

Answer to Problem 12MCQ

Option b and option c are the same and correct.

Explanation of Solution

Explanation for the correct option:

b and c.

The value of dollar $1 that is lent today for one year can be determined by using the formula, i.e., $1/ ($1+r). It means that $1 will be of less value depending upon the inflation rate after one year. Both options b and c are similar. Therefore, option b and option c both are correct.

Explanation for incorrect options:

a.

The future value of $1 will be determined by using $1($1+r) which means the future value of $1 will be greater due to the growth rate. Therefore, option a is incorrect.

d.

The present value of the dollar can be determined by using $1/ ($1+r) for one year whereas for two years it will be $1/ ($1+r) ^2 and so on. Therefore, option d is incorrect.

e.

The present value of the dollar can be determined by using $1/ ($1+r) for one year whereas for two years it will be $1/ ($1+r) ^2 and so on. Therefore, option e is incorrect.

Economics Concept Introduction

Present value of money: This is the concept that is used by every investor or financial dealer where the value of the dollar received today is compared with the value of the dollar that is expected to be received later by using interest rates.