Suppose that the interest rate is 7 percent.Consider four payment options: Option A: $500 today.
Option B: $550 one year from today.
Option C: $575 two years from today.
Option D: $600 three years from today.
Which of the payments has the lowest present value today?
A)Option A
B)Option B
C)Option C
D)Option D

Question

Quizplus · Accepted Answer

The present value of each option is calculated using the formula PV = FV / (1 + r)^n. Option D has the lowest present value because the future payment is furthest away, and the discounting effect is greatest.

Suppose That the Interest Rate Is 7 Percent