Question

2) a) b) Jay's brother has offered to give him either $5,000 today or $7,000 in 4 years. If the opportunity cost of both options is 7% per year, which option should Jay choose? At what opportunity cost will Jay be indifferent between the two options?

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Answer 1

Please see the attachment for the timeline and the solution to the problems.

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(2)(a)py of 7,000 in 4 years DV=? 8=7% 7 000 7,000 PV = = $5340. 266484 1.074 in years 2000 4 areate greater is is of Since the PV today, Jay than offered should the $5,000 choose $7,000 in 4 years (b) is The opportunity cost at which Jay be incefferent calculated by setting the PV = $5,000. 7,000 5,000 = - 4 7,000 = (1+0)4 = (178)4 (1+) = 5000 (1+0) = (1.459 = 1,087757306 - 8 = 0.087757306 r: 8.7757306.). o