1. Which would you prefer: $50,000 today, $100,000 ten years from now, or $150,000 twenty years...

1. Which would you prefer: $50,000 today, $100,000 ten years from now, or $150,000 twenty years from now? Answer this question in the face of each of three different scenarios: annual interest rates of 3%, 5%, and 7%.

Solutions

Expert Solution

	scenario 1- when interest rate is 3%
	present value of 50000 today		50000/(1.03)^0	50000
	present value of 100000 10 years from now	pv = fv/(1+r)^n	100000/(1.03)^10	74409.39
	present value of 150000 20 years from now	pv = fv/(1+r)^n	150000/(1.03)^20	83051.36
1-	I would prefer 150000 20 years from now
	scenario 2- when interest rate is 5%
	present value of 50000 today		50000/(1.05)^0	50000
	present value of 100000 10 years from now	pv = fv/(1+r)^n	100000/(1.05)^10	61391.33
	present value of 150000 20 years from now	pv = fv/(1+r)^n	150000/(1.05)^20	56533.42
2-	I would prefer - 100000 10 years from now
	scenario 3- when interest rate is 7%
	present value of 50000 today		50000/(1.07)^0	50000
	present value of 100000 10 years from now	pv = fv/(1+r)^n	100000/(1.07)^10	50834.93
	present value of 150000 20 years from now	pv = fv/(1+r)^n	150000/(1.07)^20	38762.85
3-	I would prefer - 100000 10 years from now

jeff jeffy answered 5 months ago

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