Question

In: Finance

Consider the following? alternatives: i.$110 received in one year ii.$230received in five years iii.$310received in 10...

Consider the following? alternatives:

i.$110 received in one year ii.$230received in five years iii.$310received in 10 years

a. Rank the alternatives from most valuable to least valuable if the interest rate is 9% per year.

b. What is your ranking if the interest rate is 4% per? year?

c. What is your ranking if the interest rate is 13% per? year?

Solutions

Expert Solution

a. for interest rate 0f 9% per year

present value of 110 received in one year = 110/(1+0.09)^1 = 100.91

present value of 230 received in 5 year = 230/(1+0.09)^5 = 149.48

present value of 310 received in 10 year = 310/(1+0.09)^10 = 130.94

230 in 5 years is most valuable, followed by 310 in 10 years and at last 110 in one year

b. for interest rate 0f 4% per year

present value of 110 received in one year = 110/(1+0.04)^1 = 105.77

present value of 230 received in 5 year = 230/(1+0.09)^5 = 189.04

present value of 310 received in 10 year = 310/(1+0.09)^10 = 209.42

310 in 10 years is most valuable, followed by 230 in 5 years and at last 110 in one year

c. for interest rate 0f 13% per year

present value of 110 received in one year = 110/(1+0.13)^1 = 97.34

present value of 230 received in 5 year = 230/(1+0.09)^5 = 124.83

present value of 310 received in 10 year = 310/(1+0.09)^10 = 91.32

230 in 5 years is most valuable, followed by 110 in 1 year and at last 310 in 10 years

jeff jeffy answered 2 years ago
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