Question 68

Present value concept best illustrated by $1,000 in 12 yrs worth $620 today.

This statement encapsulates the essence of the present value concept, which emphasizes how future cash flows are discounted to determine their equivalent value today. The amount of $1,000 to be received in 12 years has a present value of $620, illustrating the time value of money.

A) Exchange rate 1 USD = 1.10 CAD

This option refers to the current exchange rate between two currencies, which does not directly illustrate the present value concept. While exchange rates can involve time value considerations, they do not explicitly demonstrate the principle of discounting future cash flows to present value.

B) $1,000 in 12 yrs worth $620 today

This option directly illustrates the present value concept. It shows how a future sum of money, $1,000, is worth less today due to the time value of money, indicating that it can be discounted back to its present value of $620. This example effectively captures the core principle of present value.

C) $500 yields $50 dividends

This choice describes a scenario involving dividends but does not effectively illustrate the present value concept. While dividends are relevant to investment returns, they do not provide an explicit comparison of future cash flows to their present value.

D) Min wage indexed to CPI

Indexing minimum wage to the Consumer Price Index (CPI) relates to inflation adjustments rather than the present value concept. This option addresses how wages are adjusted over time but does not convey the process of discounting future amounts to present value.

Conclusion

The option B, stating that $1,000 in 12 years is worth $620 today, clearly illustrates the present value concept by demonstrating how future money is valued less in today's terms due to the time value of money. All other options fail to provide a direct connection to the present value principle, focusing instead on unrelated financial concepts.