Question

Your brother has offered to give you either $60:000 today or $120,000 in 14 years. If the interest rate is 5% per year which option is preferable?

Answer 1

The option to receive $120,000 in 14 years is preferable.

Step-by-step explanation:

To determine which option is preferable, we need to calculate the present value of the $120,000 in 14 years at a 5% interest rate. The formula to calculate the present value is:

Present Value = Future Value / (1 + Interest Rate)N

Using this formula, the present value of $120,000 is:

Present Value = $120,000 / (1 + 0.05)14 = $120,000 / 1.925 = $62,337.66

Since the present value of $120,000 is greater than $60,000, the option to receive $120,000 in 14 years is preferable.