Question

Suppose that you are given a choice of receiving your scholarship in the amounts of $5,000 today and $5,000 next year, or receiving $9,000 all at once today. If the interest rate is 10%, which choice should you choose in order to maximize the present value of your scholarship?

Answer 1

Answer:

Option 1 is more preferable.

Step-by-step explanation:

As provided, the two options are:

Option 1

$5,000 today and $5,000 next year

The prevailing interest rate is 10%

Therefore, present value of this option

= $\frac{1}{(1 + 0.1)^0} \times 5,000 + \frac{1}{(1 + 0.1)^1} \times 5,000$

= $5,000 \times 1 + 5,000 \times 0.909 = 9,545$

Option 2

Receiving $9,000 today straight once for all the dues.

Its present value shall be

$\frac{1}{(1 + 0.1)^0} \times 9,000$

= 9,000

Since the net present value is more of option 1, the Option 1 shall maximize the value by $545 extra = $9,545 - $9,000