Posted by SHALLY on Wednesday, April 21, 2010 at 10:59pm.
Interest rate on what? Is that figuring the interest rate you can get on $250,000 for five years?
This is an ambiguous question.
I solved it by myself :) I t was a interest rate on 350,000 !!
The retirement plan will pay $250,000 immediately ‘OR’
Pays $350,000 after 5 years from the date of retirement with:
a) Interest rate (r)=0%
Then, the PV = FV/(1+r) n
= 350,000/(1+0) 5
=$350,000
So, getting $250,000 immediately is better than getting $350,000 after five years because money value today is always higher than the money value after the years.
b) Interest rate (r)=8%
Then, the PV = FV/(1+r) n
= 350,000/(1+0.08) 5
=$238,095
So, getting $250,000 immediately is better than getting $238,095 after five years as it is not worth waiting for 5 years to get lesser money. It shows that I am going to get $238,095 now which is not good than $250,000.
c) Interest rate (r)=20%
Then, the PV = FV/(1+r) n
= 350,000/(1+0.20) 5
=$140,675
So, getting $250,000 immediately is better than getting $350,000 after five years because the value of money I am getting today will be just $140,675 which is worse.
So, from all the options, the option of getting $250,000 immediately after retirement is better than the option of getting $350,000 after 5 years with different interest rates.
You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1500 two years from now, and $10,000 ten years from now.
a. What is the NPV of the opportunity if the interest rate is 6% per year? Should you take the opportunity?
b. What is the NPV of the opportunity if the interest rate is 2% per year? Should you take it now?