A judge requires Hoa to make a payment to Jordan. The judge says that Hoa can pay her either $10,000 today or $11,500 two years from today. Of the following interest rates, which is the highest one at which Hoa would be better off paying the money today?
A)5 percent
B)4 percent
C)7 percent
D)3 percent

Question

Quizplus · Accepted Answer

At an interest rate higher than 7%, the future value of $10,000 today would exceed $11,500 in two years, making it more expensive for Hoa to wait and pay later. At exactly 7%, the future value of $10,000 after two years, using the formula FV = PV(1 + r)^n, where FV is the future value, PV is the present value, r is the annual interest rate, and n is the number of years, would be $10,000 * (1 + 0.07)^2 = $10,000 * 1.1449 = $11,449, which is slightly less than $11,500. Therefore, at 7%, it's almost indifferent, but at any rate higher than 7%, it would cost more to wait.

A Judge Requires Hoa to Make a Payment to Jordan