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Chapter 21: Q. 21.3LO (page 465)

Discuss how the interest rate performs a key role in allocating resources and calculate the present discounted value of a payment to be received at a future date

Short Answer

Expert verified

There is less danger than if the dollar were used in a long-term investment that may or may not produce the desired returns.

Step by step solution

01

Given Information.

This is because a cent today is employed to earn more money in the future, lowering the value of a dollar over time and resulting in a decrease in economic currency value.

02

Explanation.

  • Today’s dollar is additionally more valuable because there's less risk than if the dollar was during a long-term investment, which can or might not yield the expected results.
  • On the opposite hand, delaying payment from an investment could also be beneficial if there's a chance to earn interest.
  • The longer payment is delayed, the more available earning potential there's. this may be enticing to businesses and will persuade them to require onthe chance of deferment.

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Most popular questions from this chapter

Understand the concept of economic rent.

Suppose that you are tryang to dectoe whether to spend \(1,000 on stocks issued by WildWeb or on bonds issued by the same company. There is a 50 percent chance that the value of the stock will rise to S2,200 at the end of the year and a 50 percent chance that the stock will be worthless at the end of the year. The bonds promise an interest rate of 20 percent per year, and it is certain that the bonds and interest will be repaid at the end of the year.

a. Assuming that your time horizon is exactly one year, will you choose the stocks or the bonds?

b. By how much is your expected end-of-year wealth reduced if you make the wrong choice?

c. Suppose the odds of success improve for WildWebi Now there is a 60 percent chance that the value of the stock will be \)2,200 at year's end and only a 40 percent chance that it will be worthless, Should you now choose the stocks or the bonds?

d. By how much did your expected end-of-year wealth rise as a result of the improved outlook for WidWeb?

Take a look at Figure 21-2. Explain why the figure implies that if the amount of accounting profit were to shrink to zero while the normal rate of return on investment remained unchanged, economic profit necessarily would become negative.

Take a look at Table 21-1. Suppose that you are planning your retirement. The appropriate interest rate for computing the present values of future dollars to be received is 8 per cent, and you plan to "cash in" all of what you save for retirement this year in exactly 30 years. How many dollars would you have to save this year to ensure being able to have a total of $50,000 accumulated 30 years from now?

Outline the differences between common stock and preferred stock.
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