Question

You are offered a choice between $770 today and $815 one year from today. Assume that interest rates are 4 percent. Which do you prefer?

Answer 1

I would prefer the 815 dollars one year from today

Step-by-step explanation:

we will calculate the present value of the 815 dollars one year from today

`(Nominal)/((1 + rate)^(time) ) = PV`

Nominal 815.00

time 1

rate 0.04

`(815)/((1 + 0.04)^(1) ) = PV`

PV 783.65

We now compare: 783.65 - 770 = 13.65

The option of 815 one year from today has a better present value than 770 today.

It would be better to wait a year and receive 815 dollars at the curent interest rate.