Question

In: Finance

If the rate of discount is 20 percent, a. Would you ratherreceive $100 today or...

If the rate of discount is 20 percent,

a. Would you rather receive $100 today or $120 in one year?

b. Would you rather receive $205 today or $240 in one year?

c. Would you rather receive $500 in one year or $610 in two years?

Expert Solution

Answer a)

Today = 100

Value of 120 today = 120 / (1+0.20)^1

= 100

indifferent to choose any option

Answer b)

Today = 205

Value of 250 today = 250 / (1+0.20)^1

= 208.33

Choose 208.33 after a year

Answer c)

value of 500 today = 500 / (1+0.20)^1 = 416.67

Value of 610 today = 610 / (1+0.20)^2

= 423.61

Choose 610 after 2 years

jeff jeffy answered 2 years ago

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