Your father offers you a choice of $135,000 in 13 years or $46,500 today. If the

Question

Your father offers you a choice of $135,000 in 13 years or $46,500 today. If the interest rate is 10 percent, how much is the $135,000 worth now? (Enter your answer as a positive number rounded to 2 decimal places.)
  

a-2. Which offer should you choose?
  

$135,000 in 13 years

$46,500 today

b-1. Now assume the offer is $135,000 in 10 years or $46,500 today. How much is the $135,000 at 10 percent for 10 years worth now? (Enter your answer as a positive number rounded to 2 decimal places.)
  
  

b-2. Now, which offer should you choose?
  

$135,000 in 10 years

$46,500 today

Explanation / Answer

a-1. Formula to calculate present value of a future single sum of money is:

PV = FV/(1+i)n

Where,

PV = Present value

FV = Future value = $ 135,000

i = Interest rate per compounding period = 10 % or 0.1 p.a.

n = No of compounding periods = 13

PV = $ 135,000/ (1+0.1)13

    = $ 135,000/ (1.1)13

    = $ 135,000/ 3.452271

    = $ 39,104.6913 or $ 39,104.69

a-2.

$ 46,500 total should be chosen as PV of $ 135,000 is less than $ 46,500.

b-1.

Using the same formula as above, we can calculate PV as:

[n = 10]

PV = $ 135,000/ (1+0.1)10

    = $ 135,000/ (1.1)10

    = $ 135,000/ 2.5937425

    = $ 52,048.3441 or $ 52,048.34

b-2.

$ 135,000 in 10 years should be chosen because PV of $ 135,000 is more than $ 46,500.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.