$360 two years from today. Which of the following is correct?
A) 1 has the highest present value and 2 has the lowest.
B) 2 has the highest present value and 3 has the lowest.
C) 3 has the highest present value and 1 has the lowest.
D) None of the above is correct.

Question

Quizplus · Accepted Answer

To compare the present values of these three amounts, we need to find out their present values today. Let P be the present value. Then:

1. P = $150/(1+0.07)^2 = $121.56
2. P = $360/(1+0.08)^2 = $303.75
3. P = $500/(1+0.09)^2 = $382.19

So the correct order of present values is 1 < 2 < 3, and the answer is C.

$360 Two Years from Today