Assume money can earn 15% compounded semi-annually. Rank the following payments in order of the payee's first choice, second choice, and third choice, respectively: 10,000 paid today, $20,000 to be paid five years from today, or $13,500,000 to be paid fifty years from today.
A) $10,000; $20,000; $13,500,000
B) $10,000; $13,500,000; $20,000
C) $13,500,000; $10,000; $20,000
D) $13,500,000; $20,000; $10,000
E) $20,000; $13,500,000; $10,000

Question

Quizplus · Accepted Answer

The present value of each option needs to be calculated to determine the best choice. The $10,000 today is already at its present value. The present value of $20,000 in 5 years and $13,500,000 in 50 years, when discounted at a 15% annual rate compounded semi-annually, will show that the $10,000 today is most valuable, followed by the $13,500,000 in 50 years, and lastly the $20,000 in 5 years. This is because the large future value of $13,500,000, even discounted back 50 years, is still more valuable than the other options when considering the power of compound interest over such a long period.

Assume Money Can Earn 15% Compounded Semi-Annually