Question

You are offered two investments:

i) You receive $500 in two months for which you need to pay $400 today.

ii) you pay $100 today, and you will receive $20 every week for six weeks.

If you must choose one of the two, which one would you choose? Assume you have no preference for when you receive the money. Fully show the analysis that informs your decision

Answer 1

Solution:

We can calculate the present value of given options to evaluate them.Lets assume interest rate of 10% per weeks

Present value of first option is:

No.of weeks in 2month=2*4=8

$500/(1+0.10)^8

=$282.24

Return on investment=($282.24/$500)*100

=56.45%

Present value of option 2 is:

=$20*PVAF(6%,6)

=$20*4.9173

=$98.35

Return on investment=($98.35/$100)*100

=98.35%

since return under option 2 is higher than return under option 1,thus I would prefer option 2(invest $100 and get $20 per weeks for 6 weeks.