Which is more valuable, receiving $775 today or receiving $885 in 2.5 years if interest rates are 7.25 percent?
A) receiving $775 today
B) receiving $885 in 2.5 years
C) They are worth the same amount
D) Need more information to make a determination.

Question

Quizplus · Accepted Answer

To determine which option is more valuable, we need to calculate the present value of receiving $885 in 2.5 years at an interest rate of 7.25%. The formula for present value is PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($885), r is the interest rate (7.25% or 0.0725), and n is the number of periods (2.5 years). Plugging in the values, we get PV = $885 / (1 + 0.0725)^2.5. This calculation results in a present value of less than $775, making receiving $775 today the more valuable option.

Which Is More Valuable, Receiving $775 Today or Receiving $885