Question

You have a choice of $1 million in 50 years or $1600 today. If your interest rate is 14%, which would you choose? Show your work to receive credit.

Answer 1

You have the 2 Options:-

Option 1: $1 million in 50 years

Option 2: $ 1600 today

- Calculatiing the Present Value of Option 1 today using Interest rate of 14%:-

Present Value = Future Value/(1+r)^n

where,

r = Periodic Interest rate = 14%

n= no of periods = 50 years

Future Value = $1,000,000

Present Value = $1,000,000/(1+0.14)^50

Present Value = $1,000,000/700.232988459

Present Value = $1428.10

Value today of Option 1 is $1428.10

So, Value today of $1 million in 50 years is $1428.10 while you can get $1600 today in other option.

Thus, It is beneficial to choose $ 1600 today