Question

Benefits that are received in the future must be discounted (put on a present value basis) before they can be compared with benefits that accrue today because

A) Earnings increase with labor market experience

B) The future is uncertain, people prefer to consume benefits earlier

C) Direct costs change with fluctuations in the market

D) Today's money is worth less in the future

Answer 1

Benefits that are received in the future must be discounted (put on a present value basis) before they can be compared with benefits that accrue today because (d)Today's money is worth less in the future.

Discount rates are needed because a dollar received today is considered more valuable than one received in the future. There are four primary reasons for this: First, positive rates of inflation diminish the purchasing power of dollars over time. Second, dollars can be invested today, earning a positive rate of return (they have an opportunity cost). Third, there is uncertainty surrounding the ability to obtain promised future income. That is, there is the risk that a future benefit will never be realized. Finally, humans are generally impatient and prefer instant gratification to waiting for long-term benefits.

Present value is the concept that states an amount of money today is worth more than that same amount in the future. In other words, it can be restated as that today's money is worth less in the future.