Question

Consider one more alternative payment plan: instead of getting the $1 million right now, you can be paid $1.3 million two years from now. How high does the interest rate need to be in order for you to prefer getting the $1 million right now

Answer 1

Higher than 14%

Step-by-step explanation:

The interest rate 'r' that would make both payments equivalent is given by the following expression.

`1.3=1.0*(1+r)^2\\r=√(1.3) -1\\r=0.14=14\%`

Therefore, in order for it to be preferable to get the $1 million right now instead of $1.3 million in two years, the interest rate must be higher than 14%.