Question

Esther, Vida, and Clair were asked to consider two different cash flows: GH¢1000 that they could receive today and GH¢3000 that would be received 3 years from today. Esther wanted the GH¢1000 today, Vida chose to collect GH¢3000 in 3 years, and Clair was indifferent between these two options. Which of the three women made the right choice? Explain

Answer 1

Esther made the right option which gives her maximum value at the end of 3 years than Vida and Clair.

Explanation:

The life is all about making the right choices. Esther has made a decision to collect GH¢1000 now. To calculate future value of Esther choice at the end of 3 year we will use formula below,

FV = PV
`(1 + r)^(t)`

discount factor at year 3 t 10% is 0.751

FV = 1000 (0.751) / (1.1)3

FV = GH¢2487.

Vidha choose to collect GH¢3000 at end of 3 year, the present value of GH¢3000 at 10% discount rate will be;

PV = FV
`(1 + r)^(-t)`

PV = 3000 (0.751)

PV = GH¢2253.

Clair is indifferent from the choices given but this is also not a smart choice.

Esther has made the right choice among the three women and she gets maximum value of GH¢2487.