$550 two years from today. Which of the following is correct?
A) 1 has the lowest present value and 3 has the highest.
B) 2 has the lowest present value and 1 has the highest.
C) 3 has the lowest present value and 2 has the highest.
D) None of the above is correct.

Question

Quizplus · Accepted Answer

To compare the present value of these options, we need to discount the $550 back to its present value using the given interest rate of 5%.

Option 1: $450 one year from today. Discounting this back using a simple interest formula gives a present value of $428.57.

Option 2: $500 one year from today. Discounting this back using a simple interest formula gives a present value of $476.19.

Option 3: $550 two years from today. Discounting this back using a simple interest formula gives a present value of $497.18.

Therefore, Option 2 has the lowest present value and Option 1 has the highest. So, the correct answer is B) 2 has the lowest present value and 1 has the highest.

$550 Two Years from Today