Question

Suppose the interest rate is 4%. a. Having $200 today is equivalent to having what amount in one year? b. Having $200 in one year is equivalent to having what amount today? c. Which would you prefer, $200 today or $200 in one year? Does your answer depend on when you need the money? Why or why not?

Answer 1

a. Having $200 today is equivalent to having what amount in one year?

FV = PV x (1+Rate) = 200 x (1+4%) = $208

b. Having $200 in one year is equivalent to having what amount today?

PV = FV / (1+Rate) = $192.31

c. Which would you prefer, $200 today or $200 in one year?

Prefer $200 today. Money today worth same money a year later.

Reason:

The $200 should be taken today than after 1 year because, if in case one doesn’t require $200 today can invest it at rate of 4% or at current rate and a year later it will become $208 (or more than $200) which is more than the value of $200 that we will get in one year time.