Question

Suppose the interest rate is 3.7%. 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? a. Having $550 today is equivalent to having what amount in one year? It is equivalent to S (Round to the nearest cent.)

Answer 1

a. Future Value = Present Value * ( 1+ Rate of interest)^Time

= $ 550* (1+3.7%)^ 1

= $ 570.35

b. Present Value = Amount * 1/(1+ Rate of Interest)^Time

= $ 550* 1/(1.037)^1

= $ 530.38

c. Since the $ 550 today is more than the Present Value of having $ 550 in one year, $ 550 today is preferred. The answer doesnot depend on when the money is needed. This is because the Present value of the amount received matters. Any amount which has a higher present value is preferred.

Answer: $ 550 today. No.