Question

Your uncle offers you a choice of $109,000 in 10 years or $35,000 today. Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods.

  
a-1. If money is discounted at 9 percent, what is the present value of the $109,000? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
  

Present value

a-2. Which offer should you choose?

• $109,000 after 10 years

• $35,000 today

Answer 1

a. 1. The present value is computed as shown below:

Present value = Future value / (1 + r)ⁿ

= $ 109,000 / 1.09¹⁰

= $ 46,042.78 Approximately

Using the financial calculator, the present value is computed as follows:

Plug 0 IN CF0

Then in C01, again plug 0 and in F01, enter 9

Then in C02, plug 109,000 and in F02, enter 1

Then press NPV, it will ask for I, in which please enter 9.

Then press down arrow key and now press CPT key, which will show NPV equal to $ 46,042.78

Present value of any sum of money which is to be received today will always be equal to that sum of money i.e. $ 35,000

a.2. Since the present value of $ 109,000 ti be received after 10 years is greater than $ 35,000, hence we shall select the option of receiving $ 109,000 after 10 years.

Feel free to ask in case of any query relating to this question