Your brother has offered to give you either $12,000 today or $20,000 in 13 years. If...

Your brother has offered to give you either $12,000 today or $20,000 in 13 years. If the interest rate is 9% per year, which option is preferable?

	A.	Take the future amount because its present value is greated than the present amount offered
	B.	Take the present amount offered because it is greater than the present value of the future amount
	C.	Take the present amount offered because it is less than the future amount
	D.	Take the future amount because the larger amount is always worth more no matter when you receive it

Solutions

Expert Solution

Let us find out which is the best option using the timevalue of money discounting and compoundin formulas

First we will discount $20000 using 9% per year rate to present value

= 20000/(1.09¹³) = $ 6523.57

Now we will compound $12000 for 13 Years

= 12000*1.09¹³ = $36789.

Hence it is better to take $12000 today and invest it @ 9% per annum

Hence the most appropriate answer is option B

Take the present amount offered because it is greater than the present value of the future amount

jeff jeffy answered 2 years ago

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