Sharon Smith will receive $1,000,000 in 50 years. The discount rate is 14%. As an alternative she can receive $2,000 today. Which should she choose?

Question

Quizplus · Accepted Answer

To determine the present value of the $1,000,000 received in 50 years, we use the formula PV = FV / (1+r)^n where PV is the present value, FV is the future value, r is the discount rate, and n is the number of years. Plugging in the values, we get:
PV = $1,000,000 / (1+0.14)^50
PV = $4,271.46
This means that the value of receiving $1,000,000 in 50 years at a discount rate of 14% is equivalent to receiving $4,271.46 today.

Comparing this to the alternative of receiving $2,000 today, it is clear that Sharon should choose the $2,000 since it has a greater present value than the $1,000,000 received in 50 years.

Sharon Smith Will Receive $1,000,000 in 50 Years