1. Assume that the average level of market interest rates is 5%. Use present value calculations...

1. Assume that the average level of market interest rates is 5%. Use present value calculations to answer the following:

a. Would you rather have $300 today or receive $305 in one year?

b. Would you rather have $300 today or $315 in one year?

c. Would you rather receive $600 in one year or $675 in two years?

Solutions

Expert Solution

Present value=Cash flow*Present value of discounting factor(rate%,time period)

1.Present value of 305=305/1.05

=$290.48(Approx)

Hence $300 today is better having higher present value

2.Present value of 315=315/1.05

=$300

Hence it is indifferent between $300 today or $315 in one year

3.Present value of $675=675/1.05^2

=675*0.907029478

=$612.24(Approx)

Hence $675 in two years is better having higher present value

jeff jeffy answered 1 year ago

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