Question

10. Suppose the interest rate is 3.5%.

a. Having $550 today is equivalent to having what amount in one​ year?

b. Having $550 in one year is equivalent to having what amount​ today?

c. Which would you​ prefer, $550 today or $550 in one​ year? Does your answer depend on when you need the​ money? Why or why​ not?

Answer 1

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

a)

Future value = 550 * (1+3.5%)

= 569.25

b)

Present value = 550/(1+3.5%)

= 531.40

c)

550 today is more valuable than 550 one year from now, due to the time value of money.