Question

P 3-24 (similar to) Your brother has offered to give you either $20,000 today or $40,000 in 10 years. If the interest rate is 7% per year, which option is preferable? The present value of the future amount (amount received n 10 years) is $1 (Round to the nearest dollar.)

Answer 1

Present value of future amount is calculated using the PV function in excel in the below quesitons:

1) =PV(7%,10,0,40000) = 20,334

40,000 in 10 years is more preferable.

2) 1300 will stay in the bank for 2 years, but 700 will earn interest only for one year, hence 2 present value will be calculated and added.  

=PV(2.5%,2,0,1300) = 1237.36

=PV(2.5%,1,0,700) = 682.93

Total = 1,920

3)

PV of 150 in one year at 12% =PV(12%,1,0,150) = 134

PV of 230 in 5 years at 12% =PV(12%,5,0,230) = 131

PV of 320 in 10 years at 12% =PV(12%,10,0,320) = 103