Question

You have the choice of receiving $50,000 now or $29,000 now and another $35,000 seven years from now. In terms of today's dollar, which choice is better and by how much? Money is worth 6.7% compounded annually. .... Which choice is better?

A. The choice of $50,000 now is better.
B. They are equal in value.
C. The choice of $29,000 now and $35,000 in seven years is better.
The better choice is greater than the alternative choice by in terms of today's dollar.

Answer 1

To determine which choice is better, we need to calculate the present value of the future payment of $35,000 in seven years. The calculation takes into account the interest rate of 6.7% compounded annually. The choice of $50,000 now is better by $453.14 in terms of today's dollar.

Step-by-step explanation:

To determine which choice is better, we need to calculate the present value of the future payment of $35,000 in seven years. We can use the formula for the present value of a future payment, which takes into account the interest rate. In this case, the interest rate is 6.7% compounded annually.

The present value of the future payment is calculated as follows:

1. 
   
3. 
   
5. 
   
7. 
   
9. 
   
11. 
    
13. 
    
15. 
    

Now, we can compare the present value of receiving $29,000 now and $35,000 in seven years to the present value of receiving $50,000 now.

Present Value of $29,000 now and $35,000 in seven years = $29,000 + $20,546.86 = $49,546.86.

Therefore, the present value of receiving $50,000 now is $50,000, while the present value of receiving $29,000 now and $35,000 in seven years is $49,546.86. So, the choice of $50,000 now is better by $50,000 - $49,546.86 = $453.14 (rounded to the nearest cent).