Your grandmother has told you she can either give you $4,800 now or $5,500 when
ID: 2803248 • Letter: Y
Question
Your grandmother has told you she can either give you $4,800 now or $5,500 when you graduate from college in three years. Your savings account earns 4% interest, compounded annually. Which option would be worth more to you now, and how much more? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to 2 decimal places.)
a. The $5,500 in the future is worth $89.50 more than the $4,800 now.
b. The $4,800 now is worth $89.50 more than the $5,500 in the future.
c. The $5,500 in the future is worth $100.00 more than the $4,800 now.
d. The $4,800 now is worth $100.00 more than the $5,500 in the future.
Explanation / Answer
Hence, correct option is a. The $5,500 in the future is worth $89.50 more than the $4,800 now.
Present value of $5,500 FV×(1÷(1+r)^n) Here, 1 rate per annum 4.00% 2 Number of years 3 3 Number of compoundings per per annum 1 4 = 1÷3 rate per period ( r) 4.00% 5 = 2×3 Number of periods (n) 3 Future value (FV) $ 5,500 Present value of $5,500 $ 4,889.48 5500*(1/(1+4%)^3)Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.