Question

Chang Lee is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both individuals apply a discount rate of 7 percent?
A) The present values of Chang Lee's and Soo Lee's money are equal.
B) In future dollars, Soo Lee's money is worth more than Chang Lee's money.
C) In today's dollars, Chang Lee's money is worth more than Soo Lee's.
D) Twenty years from now, the value of Chang Lee's money will equal the value of Soo Lee's money.
E) Soo Lee's money is worth more than Chang Lee's money given the 7 percent discount rate.

Answer 1

Answer:

C) In today's dollars, Chang Lee's money is worth more than Soo Lee's

Explanation:

The present value of receipts 6 year hence of amount $20,000 discounted at 7% rate would be: Discounting factor of 1 $ for 6 years at 7 % i.e expressed as:

$\frac{20000}{(1\ +\ .07)^{6} }$

= 20,000 × 0.6663

= $ 13,327 approx

The present value of $20,000 receipts 9 years hence discounted at 7% rate is given by:

$\frac{20000}{(1\ +\ .07)^{9} }$

= 20,000 × 0.5439

= 10,879 approx.

As is evident from above, Chang Lee's present value of receipts is more than those of Soo Lee's.