Question

8. (Solving for PV) If you are guaranteed $50,000 in 5 years, or $75,000 in 8 years, which offer would you accept if your opportunity cost is 15%? Which offer would accept if your opportunity cost is 5%? (Solving for PV) If you are guaranteed $60,000 in 6 years or $95,000 in 8 years, which offer would you accept if your opportunity cost is 15%? Which offer would you accept if your opportunity cost is 5%?

Answer 1

Question 8).

using formula

PV = FV/(1+r)^t

PV of 50000 in 5 year at 15%

PV = 50000/1.15^5 = $24858.84

PV of 75000 in 8 years at 15%

PV = 75000/1.15^8 = $24517.63

Since PV of 50000 in 5 year is more, this offer will be accepted.

Now, if rate = 5%

PV of 50000 in 5 year at 5%

PV = 50000/1.05^5 = $39176.31

PV of 75000 in 8 years at 5%

PV = 75000/1.05^8 = $50762.95

Since PV of 75000 in 8 year is more, this offer will be accepted at rate = 5%

Question 9).

PV of 60000 in 6 year at 15%

PV = 60000/1.15^6 = $25939.66

PV of 95000 in 8 years at 15%

PV = 95000/1.15^8 = $31055.67

Since PV of 95000 in 8 year is more, this offer will be accepted.

Now, if rate = 5%

PV of 60000 in 6 year at 5%

PV = 50000/1.05^5 = $44772.92

PV of 95000 in 8 years at 5%

PV = 95000/1.05^8 = $64299.74

Since PV of 95000 in 8 year is more, this offer will be accepted at rate = 5%