Question

Mr. Bensen offers Derek a choice between receiving $8,000 today or the rights to a money machine that will payout $15,000 seven years from today. Derek believes the appropriate discount rate is 9%, What should he do?

Answer 1

Present value = Future value /(1+r)n 

r = rate of interest = 0.09

n = no of years = 7

 

Present value of $15,000 

= $15,000/(1+0.09)7 

= $15,000/1.8280 

= $8205.51 

 

Since the present value of $15,000 is more than $8,000, Derek shall choose the rights to the money machine that will payout $15,000 seven years from today.

Since the present value of $15,000 is more than $8,000, Derek shall choose the rights to the money machine that will payout $15,000 seven years from today.