A customer makes two offers to settle a disputed account. He will either pay you $500 today or pay you $650 in three years. Which one of the following is correct if your company earns 10.5% on its surplus funds?
A) The company should accept the $650 offer as it pays $150 more.
B) The company should accept the $650 offer as it is worth more today.
C) The company should accept the $650 offer as it is worth $12.42 more today.
D) The company should accept the $500 offer as it is worth $18.24 more today.
E) The company should accept the $500 offer as it is worth $512.42 today.

Question

Quizplus · Accepted Answer

To determine which offer is better, we need to calculate the present value of the $650 offer using the formula for present value: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($650), r is the annual interest rate (10.5% or 0.105), and n is the number of years (3). The present value of the $650 offer is $650 / (1 + 0.105)^3 = $650 / 1.349 = $481.76 approximately. Since $500 today is more than the present value of $650 in three years, the company should accept the $500 offer.

A Customer Makes Two Offers to Settle a Disputed Account