Discounting+Study+Questions - Discounting Quiz: Study...

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Discounting Quiz: Study Questions Describe the two standard explanations for why costs and benefits are discounted. A) Time preference-prefer to have benefits now and costs later. B) Resources are productive-Invest money now and years later it will be worth more. The comments on the discussion board give the example of putting $100 in a bank and earning 5% a year on the  money.  I asked people to think about the reality behind that.  Why is the bank willing to pay 5%? The reason is that the bank can lend the money to people who then spend the money on real resources for  investments that return more in benefits than they cost.  They may use the money to rent space, buy computers, and  hire people, for example, in order to start an information technology firm which produces services that bring in more  money, i.e., are more valuable, than the resources necessary to produce them. In an example where a bank is not acting as the middle man between savers and investors, a small farmer might  invest his/her time and effort to clear more land, which s/he could then plant, and earn enough from the crops to more  than cover the costs of clearing and planting -- another investment of resources that brings more in benefits than it  cost.  The point is that real resources are invested (rather than being used for current consumption) in order to  produce things whose value to people is greater than the value of the resources -- the key to a successful investment. Explain briefly in words what discounting does.  very simple, idea I wanted to elicit.  Discounting reduces future monetary amounts and it reduces those that occur  farther in the future more than those occur close to the present. Write out the formula for net discounted benefits and define each of the terms in the formula. Be prepared to set the formula up for calculations if you are given a discount rate, values for costs and benefits, and a time horizon over which to discount. Net discounted benefits = SUM B
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Discounting+Study+Questions - Discounting Quiz: Study...

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