Question

Your sister has just been told that she will be given a $1,000 bonus next year. She is very eager to know its present value. So, she applies the ______________ process to estimate the present value of her gift.

a. growth analysis
b. discounting
c. accumulating
d. compounding
e. reducing

Answer 1

Answer:

b. discounting

Explanation:

Your sister has just been told that she will be given a $1,000 bonus next year. She is very eager to know its present value. So, she applies the discounting  process to estimate the present value of her gift.

Discounting: It is a mechanism used for determine the present value of money, which is going to be paid in future. As debtor use this mechanism to delay payment of creditor for a certain period of time in exchange of some fees or charge to be paid. As time value of money change and it does not remain same.

There are mainly three type of discounting:

• Trade discount
• Quantity discount.
• Cash discount.

Hence in the given case, she applies the discounting process to estimate present value of her gift.