After attending a special edition of the Oprah Windfree show, the host of the show has...

After attending a special edition of the Oprah Windfree show, the host of the show has promised each college student in the audience $25,000 when they graduate from college. You were lucky to be one of the audience members on that special day. You are now thinking about accelerating your graduation by one year and graduate two years from now rather than the expected three years. Assuming a positive rate of interest, the value of this gift today will:

Multiple Choice

increase over $25,000.
increase.
increase by the interest rate.
decrease.
stay the same.

Solutions

Expert Solution

Value of gift after graduation =25000
Number of Years =3
Rate is positive
PV =25000/(1+r)^3

If graduation is in 2 years
Then PV =25000/(1+r)^2

The value of this gift today will increase.(Option b is correct option)

jeff jeffy answered 2 years ago

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