You are offered a choice between $770 today and $815 one year from today. Assume that interest rates are 4%. Which do you prefer?
A) $770 today.
B) $815 one year from today.
C) They are equivalent to each other.
D) $770 today at 3% interest rates.

Question

Quizplus · Accepted Answer

To compare the two options, we need to bring the future value of $815 back to the present using the interest rate of 4%.

The formula for calculating the present value of a future amount is:

Present Value = Future Value / (1 + interest rate)^n

Where n is the number of periods.

In this case, n = 1 because the time period is one year.

So, the present value of $815 at 4% interest rate is:

Present Value = $815 / (1 + 0.04)^1 = $783.65

Since $783.65 is greater than $770, the better option is to choose $815 one year from today.

You Are Offered a Choice Between $770 Today and $815