Answered

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You are selling an asset. you can earn an interest rate of 7% per yer on your savings. You receive the following two (risk less) offers:

Offer 1: receive $400,000 today
Offer 2: Receive $500,000 in 4 years

a. Which offer should you choose?
b. At what interest rate would you be indifferent between the two offers?

Sagot :

Answer:

Option 1

5.737126344%

Explanation:

to determine which option i would prefer today, i would need to determine the present value of offer 2

Present value is the sum of discounted cash flows

[tex]\frac{500,000}{1.07^{4} }[/tex] = $381,447.61

I would prefer the first option because its present value is greater than that of option 2

The interest rate that would make me indifferent between either options would be the interest at which the present value of $500,000 in 4 years is $400,000

$400,000 = [tex]\frac{500,000}{(1 + x)^{4} }[/tex]

$400,000[tex](1 + x)^{4}[/tex] = $500,000

500,000 / 400,000= (1 + x)^{4}

1.25 = (1 + x)^{4}

[tex]1.25^{0.25}[/tex] = 1 + x

x = 5.737126344%

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