Sharon Smith will receive $1,000,000 in 50 years.The discount rate is 14%.As an alternative she can receive $2,000 today.Which should she choose?

Question

Quizplus · Accepted Answer

To determine which option is the better choice, we need to calculate the present value of the $1,000,000 she will receive in 50 years. Using the formula for present value, we get:

PV = FV / (1 + r)^n
PV = $1,000,000 / (1 + 0.14)^50
PV = $12,755.13

So the present value of $1,000,000 in 50 years at a discount rate of 14% is only $12,755.13.

Comparing this to the $2,000 she can receive today, it is clear that Sharon should choose the $2,000 today. Even if she invested the $2,000 and earned no interest, she would still have more money than if she waited 50 years to receive $1,000,000. Therefore, the best choice for Sharon is to choose Option B, the $2,000 today.

Sharon Smith Will Receive $1,000,000 in 50 Years