Question

Your father offers you a choice of $115,000 in 12 years or $46,500 today. Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods.

a-1. If money is discounted at 12 percent, what is the present value of the $115,000? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

a-2. Which offer should you choose? $115,000 in 12 years $46,500 today

b-1. Now assume the offer is $115,000 in 9 years or $46,500 today. What is the present value of the $115,000 at 12 percent for 9 years? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

b-2. Now, which offer should you choose? $46,500 today or $115,000 in 9 years

Answer 1

Year	Cash flow	PV factor	PV of cash flow
0	46500	1.000	46,500
12	115000	0.257	29,518
As we can see the PV of 115000 in 12 years is far less than 46500 today, we will accept 46500 today option
Year	Cash flow	PV factor	PV of cash flow
0	46500	1.000	46,500
9	115000	0.361	41,470
As we can see the PV of 115000 in 9 years is less than 46500 today, we will accept 46500 today option