Ian is going to receive $20,000 six years from now.Sunny is going to receive $20,000 nine years from now.Which one of the following statements is correct if both Ian and Sunny apply a 7 percent discount rate to these amounts?
A) The present values of Ian and Sunny's monies are equal.
B) In future dollars, Sunny's money is worth more than Ian's money.
C) In today's dollars, Ian's money is worth more than Sunny's.
D) Twenty years from now, the value of Ian's money will be equal to the value of Sunny's money.
E) Sunny's money is worth more than Ian's money given the 7 percent discount rate.
F) None of the above.

Question

Quizplus · Accepted Answer

To find the present value of the amounts, we need to discount them back to today's dollars. Using the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the discount rate, and n is the number of years, we get:

PV of Ian's money = $20,000 / (1 + 0.07)^6 = $13,579.85
PV of Sunny's money = $20,000 / (1 + 0.07)^9 = $12,049.70

Therefore, Ian's money is worth more in today's dollars than Sunny's money. Choice C is correct.

Ian Is Going to Receive $20,000 Six Years from Now