Question

There are 2 projects. Today, first one pay benefits of 1000€ and nothing else. Second one today, pays nothing but 1 year later(from now) 1090€.
1) If discount rate were 0%, which one would be prefered?
2) What about if rate were increased to 10%?

Answer 1

Question

(1)

Project 1 pays 1,000 euros today.

So, the present worth of payment from Project 1 is 1,000 euros.

Project 2 pays 1,090 euros 1 year later.

The discount rate is 0%.

So, the present worth of payment from Project 2 is 1,090 euros.

The present worth of payment from Project 2 is greater.

So,

If discount rate were 0%, we would prefer Project 2.

(2)

Project 1 pays 1,000 euros today.

So, the present worth of payment from Project 1 is 1,000 euros.

Project 2 pays 1,090 euros 1 year later.

The discount rate is 10%.

Calculate the present worth of the payment from project 2

PW = 1,090/(1+0.10)¹

PW = 990.91

The present worth of payment from project 2 is 990.91 euros.

The present worth of payment from Project 1 is greater.

So,

If discount rate is 10%, we would prefer Project 1.