4% interest, what is the true cost of the TV to you today ? Valuing Cash Flows a

Question

4% interest, what is the true cost of the TV to you today ? Valuing Cash Flows at Different Points in Time 17. Suppose the interest rate is 4%. a. Having $200 today is equivalent to having what amount in one year? b. Having $200 in one year is equivalent to having what amount today? c. Which would you prefer, $200 today or $200 in one year? Does your answer depend 18. You are considering a savings bond that will pay $100 in 10 years. If the interest rate 19. Ifyour bank pays you 1.5% interest and you deposit $500 today, what will your balance 20. Consider the following alternatives: on when you need the money? Why or why not? is 296, what should you pay today for the bond? be in 5 years? i. $100 received in one year ii. $200 received in 5 years iii. $300 received in 10 years a. Rank the alternatives from most valuable to least valuable if the interest rate i 10% per year. b. What is your ranking if the interest rate is only 5% per year? C. What is your ranking if the interest rate is 20% per year?

Explanation / Answer

20.

a. If interest rate is 10%, ranking : iii, ii, i.

b. If interest rate is 5%, ranking: iii, ii, i.

c. If interest rate is 20%, ranking : i, ii,iii.

PV, i = 10% PV, i = 5 % PV, i = 20% i. $ 100 received in one year. $ 90.91 $ 95.23 $ 83.33 ii. $ 200 received in 5 years. 124.18 156.71 80.38 iii. $ 300 received in 10 years. 115.66 184.17 48.45

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