You win a prize at your sorority, and you are given the following two payoff options: Option 1 is to receive $100 one year from today and $100 two years from today. Option 2 is to receive $180 today. If the annual interest rate is 10%, the present value of option 1 is:
A)$173.56.
B)$190.91.
C)$182.65.
D)$181.80.

Question

Quizplus · Accepted Answer

The present value (PV) of option 1 is calculated by discounting each future payment back to the present using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the interest rate, and n is the number of years. For $100 one year from today, PV = $100 / (1 + 0.10)^1 = $90.91. For $100 two years from today, PV = $100 / (1 + 0.10)^2 = $82.64. Adding these gives a total present value of $173.55, which rounds to $173.56.

You Win a Prize at Your Sorority, and You Are