1. You\'ve been saving up for a new car that you think costs $25,000. You alread
ID: 2649938 • 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%. explain time value of money
Explanation / Answer
If the cash of $ 5000 is deposited in bank
After 3 years it will be 5000(1+.03)3=5463.63
If the cash is collected now & deposited in bank it will give $ 5464
Total cash will be 20000+5464=$ 25464
If cash is collected after 3 years we will get $ 5000
Total cash=20000+5000= $ 25000
If cash is collected now $ deposited in the bank there will be saving of 25464-25000= $ 464 after purchasing the car, hence the amount should be collected now & deposited in the bank.
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Time Value of money is the increase in the value of money due to the effluxion of time. We always takes consideration for time value of money
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