second question, which choice would you choose? a) 110,000 today because it\'s p

Question

second question,
which choice would you choose?
a) 110,000 today because it's present value is higher
B) 340,000 in 10 years because it's present value is higher

P5-28 (similar to) (Related to Checkpoint 5.4 Present-value comparison) You are o ered S110 000 oday or SS000) ? 12 years. Assuming ha your ca If you are offered $340,000 in 12 years and you can ean 13 percent on your money, what is the present value of $340,000? e m 3 or ent in our monin wh chs ould ou choose? ?(Round to the nearest cent) Enter your answer in the answer box and then click Check Answer emaining 0 Type here to search

Explanation / Answer

The present value of a lumpsum amount can be calculated by using formula = Lumpsum / (1+r)t ; where r is the discount rate (interest rate) and t is the time period. In this case we are given two choices - 110,000 today or 340,000 after 12 years when the interest rate is 13%.

To compare we will first calculate the present value of 340000 offered after 12 years at discount rate 13%.

PV = 340000/(1+13%)12 = 78440

Hence, we should choose 110,000 today option.

Since in the question below, the same calculation is also asked for 10 years:

PV = 340000/(1+13%)10 = 100160.04

Even if the term is 10 year, still 110000 option is better since the present value is more than 340000 after 10 years option .

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