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Engineering Econonmy

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For your 21st birthday, your grandfather offers you a gift of $1000 today.

However, you have the choice of waiting 3 years and receiving $1500 OR waiting 5 years and receiving $3000.

If your money grows at a rate of 8 percent compounded annually, which alternative should you choose?

Thank you for your help!

  • Engineering Econonmy -

    To determine what you would have at the end of 3 or 5 years use:
    The following formula works for compounded annually.
    future value = P(1+r)^n

    for 1500 and 3 years at 8%

    1500(1+.08)^3

    Do this calculation and a similar one for the 5 year period and then compare.

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