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The Economists' Prediction

The second theory is discounted utility theory (Fisburn & Rubenstein, 1982). This theory, among other things involves the time value of money, e.g., money in had today is worth more in terms of what it will buy today than the same money will be worth in terms of what it will buy a year from now or four years from now or on any future date. A simple way to conceive of this concept is to consider the time value of money in relation to the rate of inflation. An annual inflation rate of five-percent means that for a stable product (no design changes, new production efficiencies, and so forth occur) one will need to pay $105 for a product that can be bought today for $100. For a company considering an investment, the time value of money also relates to risk. If the company can put $100,000 in highly secure government treasury bills and earn five-percent per year in interest, it will not commit that $100,000 to a riskier investment unless there is a good chance that the alternative investment will earn more than the nearly risk-free investment. Therefore, the company will discount the future earnings of the alternative investment by an appropriate interest rate factor to assess the riskier investment alternative in relation to the nearly risk-free investment. Going back to the illustration of the person considering the purchase of a home theatre system, the greater utility of the preferred home theatre system in relation

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The Economists' Prediction. (2000, January 01). In LotsofEssays.com. Retrieved 03:40, October 26, 2014, from http://www.collegetermpapers.com/viewpaper/1304306373.html
 
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