Question

Suppose the interest rate is 4.1% a. Having $250 today is equivalent to having what amount in one year? b. Having $250 in one year is equivalent to having what amount today? c. Which would you prefer, $250 today or $250 in one year? Does your answer depend on when you need the money? Why or why not? a. Having $250 today is equivalent to having what amount in one year? It is equivalent to $ . (Round to the nearest cent.)

Answer 1

a. Future Value = Present Value* ( 1+ Rate of Interest)^Time

= $ 250*(1+4.1%)^1

= $ 260.25

b. Present Value = Amount* 1/(1+Rate of Interest)^Time

= $ 250* 1/(1+4.1%)^1

= $ 240.15

c. The correct answer is $ 250 today. No.

This is because $ 250 today is more than the present value of having $ 250 in one year. This doesnot depends on when the money is needed. It depends upon the higher present value.