Suppose the interest rate is 8 percent.Consider three payment options:
1)$200 today.
2)$220 one year from today.
3)$240 two years from today.
Which of the following is correct?
A)Option 1 has the highest present value and Option 2 has the lowest.
B)Option 2 has the highest present value and Option 3 has the lowest.
C)Option 3 has the highest present value and Option 1 has the lowest.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

To determine the present value of each option, we need to use the formula: PV = FV / (1 + r)^n, where r is the interest rate and n is the number of years until the payment is received. Using the given interest rate of 8 percent, we can calculate the present value of each option as follows:

Option 1: PV = 200 / (1 + 0.08)^0 = $200 
Option 2: PV = 220 / (1 + 0.08)^1 = $203.70 
Option 3: PV = 240 / (1 + 0.08)^2 = $207.85

Therefore, Option 3 has the highest present value and Option 1 has the lowest. It's worth noting that Option 2 has a higher future value ($220) than Option 1 ($200), but it's received one year later, so its present value is lower.

Suppose the Interest Rate Is 8 Percent