Question

g If a firm can earn a profit stream of $50,000 per year for 10 years, that profit stream is worth:1)A)nothing today)less than $500,000 today, but a positive amount.C)$500,000 today.D)more than $500,000 today.E)some amount, but whether it is more, less or the same as $500,000 cannot be determined.

Answer 1

Answer:

b)less than $500,000 today, but a positive amount.

Explanation:

By the virtue of the concepts of compounding and discounting, we understand that $1 today is worth more that $1 in the future.

Where Pv = Present value

Fv = Future value

r = discount rate

t = time

Fv = Pv ( 1 + r)^t

As such If a firm can earn a profit stream of $50,000 per year for 10 years, that profit stream is worth less than $500,000 today, but a positive amount.