Question

John is going to receive a $25,000 gift five years from now. Carol is going to...

John is going to receive a $25,000 gift five years from now. Carol is going to receive a gift of the same amount seven years from now. Both use the same discount rate of 5%.

Pick the correct statement related to their gifts from below.

  • The present values of John's and Carol's gifts are equal.

  • In future dollars, Carol's gift is worth more than John's gift.

  • In today's dollars, John's gift is worth more than Carol's.

  • Twenty years from now, the value of John's gift will equal the value of Carol's gift.

  • Carol's gift is worth more than John's gift given the 5 percent discount rate.

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Answer #1

The present value is calculated by discounting the value of gifts at 5%

formula used :

present value = value of gift/((1+5%)n)

where n = period until gift is received

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