Asked by Calvin Nowicki on Jul 12, 2024
Verified
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
Payment
The transfer of money, goods, or services from one party to another in exchange for something of value, often fulfilling a contractual obligation or debt.
Interest Rates
The expense associated with acquiring a loan, usually represented as a proportion of the sum lent.
Better Off
A condition in which an individual or group's situation improves in terms of economic welfare, happiness, or other measures of well-being.
- Analyze different investment or savings options based on their present or future values.
- Examine how alterations in interest rates modify the present value of future monetary disbursements.
Verified Answer
TK
Tushar KapatelJul 18, 2024
Final Answer :
C
Explanation :
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.
Learning Objectives
- Analyze different investment or savings options based on their present or future values.
- Examine how alterations in interest rates modify the present value of future monetary disbursements.