Question

Suppose the interest rate is 4.3 %. a. Having $ 500 today is equivalent to having what amount in one​ year? b. Having $ 500 in one year is equivalent to having what amount​ today? c. Which would you​ prefer, $ 500 today or $ 500 in one​ year? Does your answer depend on when you need the​ money? Why or why​ not?

Answer 1

Answer a.

Present Value = $500
Interest Rate = 4.30%

Future Value = Present Value * (1 + Interest Rate)
Future Value = $500 * 1.043
Future Value = $521.50

Answer b.

Future Value = $500
Interest Rate = 4.30%

Present Value = Future Value / (1 + Interest Rate)
Present Value = $500 / 1.043
Present Value = $479.39

Answer c.

You should prefer to have $500 today instead of $500 in one year. As present value of $500 in one year is less than the $500 today.

This answer depends on the interest rate earned during the period.