Scenario: Tom has two investment options. He can either invest $3,000 in a friend's project or he can deposit the same amount in a bank that offers him an annual rate of interest of 6 percent. If he invests in his friend's project, he will receive $3,400 after 5 years.
-Refer to the scenario above.What is the present value of $3,400 to be received after 5 years?

Question

Quizplus · Accepted Answer

To calculate the present value of $3,400 to be received after 5 years, we need to use the formula for present value of a future amount:
PV = FV / (1 + r)^n
PV = 3400 / (1 + 0.06)^5
PV = $2,540.68

The best choice is to deposit the $3,000 in the bank that offers the annual rate of interest of 6 percent. This is because the present value of $3,400 after 5 years with this investment option is higher than the initial investment of $3,000. Investing in the friend's project does not guarantee any return and is a riskier investment option.

Scenario: Tom Has Two Investment Options