At an annual interest rate of 6%, which would you prefer; three annual year-end cash flows...
At an annual interest rate of 6%, which would you prefer; three annual year-end cash flows of $250 each with the first cash flow one year from today or $668.25 today? Why? (You could be indifferent.) Respond to a classmate who has a different preference and provide an argument against his preference. Note: If everyone has the same preference, you do not need to respond to a classmate.
Homework Answers
The present value of a future cash flow = future cash flow / (1 + r)n,
where r = annual rate of interest
n = number of years
The present value of $250 for 3 years @ 6% = $250 / (1 + 6%)1 + $250 / (1 + 6%)2 + $250 / (1 + 6%)3
The present value of $250 for 3 years @ 6% = $668.25
The present value of $668.25 and the amount receivable today ($668.25) are equal. Hence, we are indifferent between the two options
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