Which of the following statement is correct?
A) The present value of any future cash flow stream is a sum of present values of each cash flow in the stream.
B) The present value of any future cash flow stream is a sum of future values of each cash flow in the stream.
C) The present value of any future cash flow stream is a sum of the values of each cash flow in the stream.
D) None of the above

Question

Quizplus · Accepted Answer

The correct statement is that the present value of any future cash flow stream is a sum of present values of each cash flow in the stream. This is because the present value accounts for the time value of money and calculates what the future cash flows are worth today. By discounting each cash flow to its present value and summing them up, we get the present value of the entire cash flow stream. B and C are incorrect because they do not account for the time value of money - summing up the future values or the values of each cash flow does not take into consideration the fact that money is worth more today than the same amount in the future.

Which of the Following Statement Is Correct