Question

QUESTION 25 2 points Save Answer Which would you prefer? Option X: $200 in five years time if the discount rate is 2%; or Option Y: $100 in five years time if the discount rate is 2%. O They are both worth $100 in five years time o Option X O Option Y o It depends on the market interest rate QUESTION 26 Save Answer What is a generally accepted value for the social discount rate? 3% 20% 02.00% 0 0.20% 0 0%

Answer 1

25. To compare the two options, the present value of both the options must be taken into account. To calculate the present value, the following formula can be used:

P.V. = + r)"

Where P.V. is the present value, A is the future value, r is the rate of interest and n represents the number of payments.

The present value of both the options is calculated below:

Option X:

200 P.V.= 11 +0.02)

P.V. - 7.0275 200

P.V. = 181.146 (approximately)

Option Y:

100 P.V.+0.02)

P.V. - 11.02)5 100

P.V. = 90.573 (approximately)

Therefore, 'Option X' will be preferred because it has greater present value than the 'Option Y'.