Question

You are offered

$100,000

today or

$300,000

in

13

years.  Assuming that you can earn

11

percent on your money, which should you choose?

If you are offered

$300,000

in

13

years and you can earn

11

percent on your money, what is the present value of

$300,000

Answer 1

Interest rate = 12%

Time =15 years

Present value of $360,000 = $360,000 * [1/(1 + 0.12)]¹⁵

Present value = $360,000 * 0.1826963

Present value = $65,770.65

So present value of $360,000 receivable in 15th year is $65,770.65.

b) You receive right now $80,000 it is preferable to choose $80,000 today rather than receiving $360,000 in 15th year

So, one should choose to receive $80,000