Final answer:
Discounting is the process of determining the present value of future cash flows using a discount rate. In the provided choices, (A) What is a $1,000 gift to be received next year worth today, and (C) How much do you need to invest today to have $40,000 in the future, illustrate discounting because they both involve calculating the present value of future money.
Step-by-step explanation:
Solving problems that illustrate discounting involves determining the present value of future cash flows by applying a discount rate. This process takes into consideration the time value of money, which acknowledges that receiving money today is worth more than receiving the same amount in the future due to its potential earning capacity.
Regarding the student's multiple-choice query:
- A. What is a $1,000 gift to be received next year worth today if the interest rate is 5 percent? illustrates discounting because it involves finding the present value of money to be received in the future.
- C. How much do you need to invest today at 7 percent interest to have $40,000 available for college expenses in 17 years? also illustrates discounting because it requires calculating the amount of current investment needed to reach a specific future sum when discounted at a given interest rate.
However:
- B. Three years ago, you deposited $1,200 in a savings account that pays 1.5 percent interest. How much is the account worth today? is an example of future value calculation, not discounting.
- D. If you invest $6,000 today at 5 percent interest, how much will you have 6 years from now? is also an example of future value calculation.
Understanding discounted value is essential in financial decisions, such as whether or not to purchase a bond or assess investment opportunities.