Question

Assume Rafael can earn a(n) 5 percent after-tax rate of return. Use Exhibit 3.3. Would he prefer $1,100 today or $1,650 in five years? O $1,100 today $1,650 in five years

Answer 1

B.$1,650 in five years.

(this shall be selected).

working:

present value of $1650 in five years.

=>$1650 * 1/ (1+r)^n

here,

r = 5%=>0.05.

n=5 years.

=>1650*1/(1.05)^5

=>1650*0.78352617

=>$1,292.82.

since the present value of amount received 5 years later is greater than the amount received today i.e $1100, so $1650 shall be accepted after 5 years.