Question

Jeff has the opportunity to receive? lump-sum payments either now or in the future. Which of the following opportunities is the? best, given that the interest rate is 4?% per? year?

A. one that pays $ 900 now

B. one that pays $ 1080 in two years

C. one that pays $ 1350 in five years

D. one that pays $ 1620 in ten years

Answer 1

Ans : C. one that pays $ 1350 in five years

In order to get the answer, we need to know the present value of all the values by using the formula:

where t = number of years

Option A:

Present Value = $ 900

Option B:

Present Value = $ 1080 / ( 1 + 0.04 )² = $ 1080 / 1.0816 = $ 999

Option C:

Present Value = $ 1350 / ( 1 + 0.04)⁵ = $ 1350 / 1.2166 = $ 1110

Option D:

Present Value = $ 1620 / ( 1 + 0.04)¹⁰ = $ 1620 / 1.4802 = $ 1094

Hence, we see that Present Value of Option C is highest and it will considered as be best opportunity.