Chang Lee is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both individuals apply a discount rate of 7 percent?
A) The present values of Chang Lee's and Soo Lee's money are equal.
B) In future dollars, Soo Lee's money is worth more than Chang Lee's money.
C) In today's dollars, Chang Lee's money is worth more than Soo Lee's.
D) Twenty years from now, the value of Chang Lee's money will equal the value of Soo Lee's money.
E) Soo Lee's money is worth more than Chang Lee's money given the 7 percent discount rate.

Question

Quizplus · Accepted Answer

The present value of a future cash flow decreases as the discount rate increases and the time to receive the cash flow increases. Both individuals are receiving the same amount of money, but the fact that Chang Lee receives the money earlier means that the present value of his money is higher than that of Soo Lee. Therefore, the correct statement is that in today's dollars, Chang Lee's money is worth more than Soo Lee's.

Chang Lee Is Going to Receive $20,000 Six Years from Now