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

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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