Question

. Consider the following alternatives: i. $100 received in one year ii. $200 received in 5 years iii. $300 received in 10 years a. Rank the alternatives from most valuable to least valuable if the interest rate is 10% per year. b. What is your ranking if the interest rate is only 5% per year? c. What is your ranking if the interest rate is 20% per year?

Answer 1

a) Rate = 10%
Value of 100 in 1year = 100/(1+10%) = 90.91
Value of 200 in 5 years = 200/(1+10%)⁵ = 124.18
Value of 300 in 10 years = 300/(1+10%)¹⁰ = 115.66

Ranking
Opotion 2 > Option 3> Option 1

b)Rate = 5%
Value of 100 in 1year = 100/(1+5%) = 95.24
Value of 200 in 5 years = 200/(1+5%)⁵ = 156.71
Value of 300 in 10 years = 300/(1+5%)¹⁰ = 184.17
Ranking
Option 3 > Option 2> Option 1

c) Rate = 20%
Value of 100 in 1year = 100/(1+20%) = 83.33
Value of 200 in 5 years = 200/(1+20%)⁵ = 80.38
Value of 300 in 10 years = 300/(1+20%)¹⁰ = 48.57

Option 1 > Option 2> Option 3

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