Question

Jeff has the opportunity to receive​ lump-sum payments either now or in the future. Which of the following opportunities is the​ best, given that the interest rate is ​4% per​ year?
a. one that pays $ 900 now
b. one that pays $ 1080 in two years
c. one that pays $ 1350 in five years
d. one that pays $ 1620 in ten years

Answer 1

Answer:

c. one that pays $ 1350 in five years

Explanation:

we have to calculate the present value of each option:

• option a, $900 (that is the present value)
• option b, $1,080 in 2 years. PV = $1,080 / (1 + 4%)² = $998.52
• option c, $1,350 in 5 years. PV = $1,350 / (1 + 4%)⁵ = $1,109.60
• option d, $1,620 in 10 years. PV = $1,620 / (1 + 4%)¹⁰ = $1,094.41

Option c yields the highest present value = $1,109.60