11. (Related to Checkpoint 5.4) (Present-value comparison) You are offered $100,

Question

11. (Related to Checkpoint 5.4) (Present-value comparison) You are offered $100,000 today or $300,000 in 15 years. Assuming that you can earn 16 percent on your money, which should you choose? If you are offered $300,000 in 15 years and you can earn 16 percent on your money, what is the present value of $300,000? Round to the nearest cent.) Which offer should you choose? (Select the best choice below.) O A. O B. Choose $300,000 in 15 years because its present value is higher. Choose $100,000 today because its present value is higher.

Explanation / Answer

11. Present value of $300,000 in 15 years @16% can be known from below:

=>Future amount * (1 / (1+r)^n)

here,

Future amount = $300,000

r = rate of interest = 16% =>0.16.

n = 15 years.

=>$300,000 *(1 /(1.16)^15)

=>$300,000 * (0.10792701)

=>$32,378.10....(rounded to nearest cent).

Present value of $300,000 to be received after 15 years at 16% rate is $32,378.10.

2nd part:

B. Choose $100,000 today becasue its present value is higher.

(present value of $100,000 received today is $100,000 itself).

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