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Chapter 4: Q8BP-a (page 282)

Your father offers you a choice of \(105,000 in 12 years or \)47,000 today. a. If money is discounted at 8 percent, which should you choose?

Short Answer

Expert verified

The choice of $47,000 today should be preferred over $105,000 in 12 years.

Step by step solution

01

Identification of the required information

Future value (FV) = $105,000

Interest Rate (i) = 8%

Period (n) = 12 year

02

Present value (PV)

PV=FV脳(1+i)-n=$105,000脳(1+8%)-12=$41,696.94

03

Final decision

The present value of $105,000 in 12 years is $41,696.94 which is lower than $47,000 today. Thus, the option of $47,000 today should be chosen.

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