Question

You must decide between $25,000 in cash today or $30,000 in cash to be received two years from now. If you can earn 8 percent interest on your investments, which is the better deal?

Answer 1

Answer:

The deal to receive $30000 is better.

Explanation:

To find the better deal we need to calculate the present value of $30000 and then compare it with the amount $25000. If the amount is greater than the $25000, then the amount should be received after the 2 years.

The given time period (n )= 2

Interest rate (r ) = 8%

The amount received after 2 years = $30000

$\text{Present value of money} = \frac{Future \ value}{(1 + r)^n } \\= \frac{30000}{(1+0.08)^2} \\= 25720.16$

Since the amount is more than $25000 so the deal to receive the money after 2 years will be better.