Question

(Present-value comparison) You are offered $2,000 today, $7,000 in 8 years, or $26,000 in 25 years. Assuming that you can earn 11 percent on your money, which offer should you choose? a. What is the present value of $26,000 in 25 years discounted at 11 percent interest rate? $___________(Round to the nearest cent)

Answer 1

Offer 1: Amount of $2,000 today

Offer 2: Amount of $7000 in 8 years

Calculating its Present Value today:-

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

Where,

r = Interest rate = 11%

n= no of periods = 8 years

Present Value = $7000/(1+0.11)^8

Present Value = $7000/2.30453776972

Present value = $3037.49

So, the present value of $7,000 in 8 years discounted at 11 percent interest rate is $3037.49

a). Offer 3: Amount of $26,000 in 25 years

Calculating its Present Value today:-

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

Where,

r = Interest rate = 11%

n= no of periods = 25 years

Present Value = $26,000/(1+0.11)^25

Present Value = $26,000/13.5854638029

Present value = $1913.81

So, the present value of $26,000 in 25 years discounted at 11 percent interest rate is $1913.81

Conclusion:- Offer 2 has highest Present value. So, it should be accepted.

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