Answer:
The second alternative is the one that will allow her to consume more in her old age.
Explanation:
Giving the following information:
Lara allocates wealth between two periods: youth (time 1) and old age (time 2).
In her youth, she has $8,000 in cash. She can borrow and lend at the bank at a rate of 15% between time 1 and time 2.
Her only investment opportunity other than the bank is a project that costs $5,000 now in her youth and has a payoff of $6,000 in her old age.
Alternative A:
We will use the final value formula.
FV= Present Value*(1+i)^n
FV= 8000*(1.15)^1= $9200
Alternative B:
Receive $6000
Invest 3000= 3000*(1.15)^1= 3450
Total= $9450
The second alternative is the one that will allow her to consume more in her old age.
