Based on a discount rate of 8%, would you rather receive $100 today (option 1) or...
Based on a discount rate of 8%, would you rather receive $100 today (option 1) or $2,500 in 40 years (option 2)?
Homework Answers
option 1:
the present value of $100 received today will be $100 itself.
option 2:
the present value of $2500 to be received in 40 years
=> amount / (1+r)^n
=>$2500 / (1.08)^40
=>$115.08......(rounded to two decimals).
Option 2 is preferable.
since the present value of $2500 to be received in 40 years @8% is $115.08, which is greater than $100 received under option 1.
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