You are offered $800 after six years (Offer 1) or $100 a year for six years...

You are offered $800 after six years (Offer 1) or $100 a year for six years (Offer 2). If you can earn 7 percent on your funds, calculate the future values of both payments. Use Appendix C to answer the question. Round your answers to the nearest dollar. FV(Offer 1): $ FV(Offer 2): $ Which offer will you accept? If you can earn 18 percent on your funds, calculate the future values of both payments. Use Appendix C to answer the question. Round your answers to the nearest dollar. FV(Offer 1): $ FV(Offer 2): $ Which offer will you accept, if you can earn 18 percent on your funds? Why are your answers different? The choices are different as the higher interest rate

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Expert Solution

Case 1 )

Offer 1 :Future value : 800 [no interest will be received since received at end of year 6]

Offer 2:Future value = FVA 7%,6* Amount

= 7.15329*100

= 715.33 [rounded to 715]

**Assuming investment is made at end of year .

Offer 1 should be accepted since it has highest future value.

Case 2)

Offer 1 )Future value : 800

Offer 2)Future value =FVA 18%,6*Amount

= 9.44197*100

= 944.20 [rounded to 944]

Offer 2 should be accepted since it has highest future value .

case 3)The answers are different because with increase in interest rate ,the compounding of interest increases resulting in higher future value.

jeff jeffy answered 1 year ago

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