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As a result of an injury settlement with your insurance you have the choice between (1) receiving $5,000 today OR (2) $6,500 in three years. If you could invest your money at 8% compounded annually, which
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15 votes
15 votes
As a result of an injury settlement with your insurance you have the choice between (1) receiving $5,000 today OR (2) $6,500 in three years. If you could invest your money at 8% compounded annually, which option should you pick

User Jmancuso
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1 Answer

13 votes
13 votes

Answer:

option 2

Step-by-step explanation:

to determine the better option, calculate the present value of option 2. The more suitable option is the option with the higher present value

Present value is the sum of discounted cash flows

Present value = future value / ( 1 + r)^n

r = interest rate

n = number of years

6500 / ( 1.08^3) = 5159.91

the present value of option 2 is higher than that of option 1,, so pick option 2

User Paulo Matos
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