Using the tables for Present Value at the end of the chapter- do the this proble

Question

Using the tables for Present Value at the end of the chapter- do the this problem that goes like this:

1. Your Uncle Arthur, not to be out done by Aunt Carmen, offers you a choice. You can have $10,000 now or $30,000 in 15 years. If you took the payment now, you could put the money in a bond fund or bank account earning 8% interest.

Use present Value analysis to determine which alternative is better.

Please be sure to show all calculations.

Demonstrate that you understand the time value of money by using an example that is different from the above problem.

Explanation / Answer

We first see how much will $10,000 be in future if we take the $10,000 now at 8% interest rate after 15 years.

Future Value = PV(1+R)^n, where PV is $10,000, R is 8% and n is 15 years

FV = 10,000(1+.0.08)^15 = $31,721.69

So it is better alternative to take the money now and invest it in bonds which will after 15 years fetch me $31,721.69 rather than to wait for 15 years and take $30,000.

Alternatievly we can also know the present value of $30,000 and see. Present Value = Future Value / (1+r)^n

therefore PV = 30000/(1+0.08)^15 = $9457.25.

This is less than $10,000. Hence it is again proven that it is better alternative to take the money now and invest it in bonds.

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