Question

Suppose the interest rate is 4.0 %. a. Having $ 200 today is equivalent to having what amount in one​ year? b. Having $ 200 in one year is equivalent to having what amount​ today? c. Which would you​ prefer, $ 200 today or $ 200 in one​ year? Does your answer depend on when you need the​ money? Why or why​ not?

Answer 1

Answer:

a. Having $200 today is equivalent to having $200(1\ +\ .04)^{1}$ = $208

b. Having $200 in one year is equivalent to having $\frac{200}{(1\ +\ .04)}$  i.e $192 today.

c. $200 today would be preferred since $200 received one year hence will have lower present value i.e it would be equivalent to $192 received today.

d. The answer provided above in (c) did not take into consideration the requirement or need. It only considered time value of money. If money is required today, it will be availed today irrespective of the time value of money principle since needs override principles.