Amanda is considering one of two options. The first option is to receive $48,000 now. The second option is to receive $75,000 at the end of the fifth year. Determine which option should be chosen to maximize benefits now given an interest rate of 8.8% compounded annually.
A) Second option, as it provides benefit of $54,194.53 compared to $48,000 for second
B) Second option, as it provides benefit of $53,194.53 compared to $48,000 for second
C) Second option, as it provides benefit of $52,194.53 compared to $48,000 for second
D) Second option, as it provides benefit of $51,194.53 compared to $48,000 for second
E) Second option, as it provides benefit of $49,194.53 compared to $48,000 for second

Question

Quizplus · Accepted Answer

To determine which option maximizes benefits now, we need to calculate the present value of the $75,000 to be received in 5 years at an 8.8% annual interest rate. The formula for present value is PV = FV / (1 + r)^n, where FV is the future value, r is the annual interest rate, and n is the number of years. Plugging in the values, we get PV = $75,000 / (1 + 0.088)^5, which calculates to approximately $49,194.53. Comparing this to the $48,000 available now, the second option is better, but the benefit is $49,194.53, not the other values listed.

Amanda Is Considering One of Two Options