Katie is going to receive $1,000 three years from now. Wilt is going to receive $1,000 five years from now. Which one of the following statements is correct if both Katie and Wilt apply a 5% discount rate to these amounts?
A) The present value of Katie and Wilt's money is equal.
B) The value of Wilt's money will be greater than the value of Katie's money six years from now.
C) In today's dollars, Wilt's money is worth more than Katie's.
D) In five years, the value of Katie's money will be less than the value of Wilt's money.
E) Katie's money is worth more than Wilt's money today.

Question

Quizplus · Accepted Answer

E) Katie's money is worth more than Wilt's money today because the present value of money decreases with time when applying a discount rate. Since Katie receives her money sooner than Wilt, her $1,000 has a higher present value when discounted back to today's dollars at a 5% rate.

Katie Is Going to Receive $1,000 Three Years from Now