1. You\'ve been saving up for a new car that you think costs $25,000. You alread
ID: 2640011 • Letter: 1
Question
1. You've been saving up for a new car that you think costs $25,000. You already have $10,000 and you think that, with interest and additional savings, the $10,000 will grow to $20,000 in three years. Suddenly, the phone rings and a voice at the other end of the line tells you that you've won $5,000. You have the choice of collecting the $5,000 immediately, or collecting it in three years which will give you enough money to buy the car. What would you do? Assume that the price of the car stays constant over the three years and that available interest for bank savings is 3%.
Explanation / Answer
Case-1
If I collect 5000 immediately and invest it for 3 years, the investment will grow at 3% and the amount at the end of 3 years =5000*(1.03^3) = 5463.635
Case-2
Collect 5000 at the end of 3 years
Obviously case-1 will have higher value. So I collect the 5000 cash now only.
A BIRD IN THE HAND WORTH TWO IN THE BUSH
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