The present value model of investment states that an asset's current price should be equal to the
A) sum of the present values of all of its future payments or earnings.
B) sum of all of its future payments or earnings times the number of years of its life.
C) life of the asset times the present values of all of its future payments or earnings.
D) present values of all of its future payments or earnings divided by its life in years.

Question

Quizplus · Accepted Answer

The present value model of investment states that an asset's current price should be equal to the sum of the present values of all of its future payments or earnings. This takes into account the time value of money, meaning that money in the future is worth less than money in the present. Therefore, the model values future payments or earnings less than current ones by discounting them. The sum of these discounted future cash flows should equal the asset's current price.

The Present Value Model of Investment States That an Asset's