Question

(Present-value comparison) You are offered $100,000 today or $300,000 in 15 years. Assuming that you can earn 16 percent on your money, which should you choose?

If you are offered $300,000 in 15 years and you can earn 16 percent on your money, what is the present value of $300,000. $____Round to the nearest cent.) Which offer should you choose? (Select the best choice below.)
a) Choose $300,000 in 15 years because its present value is higher.
b) Choose $100,000 today because its present value is higher.

Answer 1

The present value of $300,000 in 15 years at a 16% interest rate is approximately $41,959.36. Since $100,000 today has a higher present value than $41,959.36, it is the better choice to take the $100,000 today.

Step-by-step explanation:

You are considering two options: receiving $100,000 today or $300,000 in 15 years. To make an informed decision, you need to calculate the present value (PV) of the $300,000 that would be received in the future, discounting it by the rate of return you can earn on your money, which is 16%. The formula to calculate the present value is PV = FV / (1 + r)^n, where FV is the future value, r is the interest rate, and n is the number of years until the amount is received.

The present value of $300,000 received in 15 years at a 16% interest rate is calculated as follows:

PV = $300,000 / (1 + 0.16)^15

PV = $300,000 / (1.16)^15

PV = $300,000 / 7.1486

PV = $41,959.36 (rounded to the nearest cent)

Comparing this present value with the option of receiving $100,000 today, it is clear that $100,000 today has a higher present value. Therefore, option b) Choose $100,000 today because its present value is higher is the better choice.