The option with higher present value when interest rate is 2 % .

Question

Want to see the full answer?

Answer 1

Question

Chapter 15, Problem 3P

(a)

To determine

The option with higher present value when interest rate is 2%.

(b)

To determine

Change in the option having higher present value when interest rate decreases to 1%

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Jamal has a utility function U = W1/2, where W is his wealth in millions of dollars and U is the utility he obtains from that wealth. In the final stage of a game show, the host offers Jamal a choice between (A) $4 million for sure, or (B) a gamble that pays $1 million with probability 0.6 and $9 million with probability 0.4. (1) Does A or B offer Jamal a higher expected utility? Explain your reasoning with calculations. (2) Should Jamal pick A or B? Why? I would like help with the unanswered last parts of the questions.

You are in the market for a new refrigerator for your company's lounge, and you have narrowed the search down to two models. The energy-efficient model sells for $700 and will save you $45 at the end of each of the next five years in electricity costs. The standard model has features similar to the energy-efficient model but provides no future saving in electricity costs. It is priced at only $500. Assuming your opportunity cost of funds is 6 percent, which refrigerator should you purchase?

Q) A star baseball player signs a contract that would pay a total of $16 million. The player receives $4 million upon signing, and $3 million every year for the next four years. (In other words, the player will receive $4 million today, $3 million in a year from today, etc.)At an interest rate of 4 percent, the sum of the present value of the contract is $__. Your answer should be a whole number. If the contract is spread over fewer years, the present value of the contract would __________ (options: increase or decrease)