Question

Assume you have to choose between two options: 1. Receive $100

today 2. Receive $200 in one year. Under what circumstances would
it make sense to accept option 1? (Hint: you should consider the
level

Answer 1

It would make sense to accept $100 today if the time value of money, immediate financial needs, or high inflation exist, or if the person's discount rate is high.

Step-by-step explanation:

Accepting option 1, which is receiving $100 today, might make sense under several circumstances despite the fact that option 2 offers more money in the future. One such circumstance is the time value of money, which suggests that money available right now is worth more than the same amount in the future due to its potential earning capacity

. Additionally, the necessity of immediate funds for an urgent expense or the presence of high inflation, which could erode the purchasing power of the future amount, could also justify choosing the immediate payment. Moreover, if the individual's discount rate (reflecting their preference for current over future consumption) is high enough, they might value the current $100 more than $200 in the future.