Question

Vince says that the present value of $500 to be received one year from today if the interest rate is 8 percent is more than the present value of $500 to be received two years from today if the interest rate is 4 percent. Terri says that $500 saved for two years at an interest rate of 3 percent has a larger future value than $500 saved for one years at an interest rate of 6 percent. a. Both Vince and Terri are correct. b. Only Vince is correct. c. Only Terri is correct. d. Neither Vince nor Terri is correct.

Answer 1

A

Step-by-step explanation:

To determine if Vince is right, we have to determine the present value of the amounts

Present value is the sum of discounted cash flows

Present value of $500 to be received one year from today

500 / 1.08 = $462.96

Present value of $500 to be received two years from today

500 / (1.04^2) = $462.28

$462.96 > $462.28 Vince is right

To determine if Terri is right, we have to determine the future value of the amounts

The formula for calculating future value:

FV = P (1 + r)^n

FV = Future value

P = Present value

R = interest rate

N = number of years

500 x (1.03)^2 = $530.45

500 x (1.06) = $530

$530.45 > $530 Terri is right

they are both correct