Can somebody people check this out and let me know if I did it right? Your uncle offers you a choice of $30,000 in 50 years or $95 today. If money is discounted at 12 percent, which should you choose? You should take the $95.
Option #1: Using appendix b
PV =FV [1/ (1+i) ^n]
PV=FV [1/ (1+i) ^50] (n= 50, i=12%)
PV=$30,000[1/.003]
PV=$30,000 x .003= $90
Option #2
PV= $95
I came to this conclusion by using appendix b. So I would take the $95 now over the $30,000 in 50 years because in today money the $30,000 would only be worth $90 in the future. And who knows, in 50 years I may not be alive to enjoy the money.
To determine whether you should choose the $30,000 in 50 years or the $95 today, you need to consider the concept of present value (PV). Present value calculates the worth of future cash flows in today's dollars by discounting them based on a certain interest rate.
Option 1 involves calculating the present value of $30,000 received in 50 years using the formula PV = FV / (1+i)^n, where FV is the future value, i is the interest rate, and n is the number of years. By plugging in the values, PV = $30,000 / (1+0.12)^50. After calculating this, you obtained a present value of $90 using the formula.
Option 2 is straightforward. You are given $95 today as an immediate choice.
Based on the calculations you provided, the present value of the $30,000 in 50 years is only $90, while you have the option to receive $95 today. Therefore, it would be advantageous to choose the $95 today as it holds more value in present terms.
Additionally, your reasoning about the uncertainty of being alive in 50 years to enjoy the money also contributes to this decision, as taking the money now allows you to benefit from it immediately.
In summary, you made the right choice by opting for the $95 today over the $30,000 in 50 years.
To determine which option is better, we can calculate the present value (PV) of the $30,000 in 50 years using the discount rate of 12 percent.
Option 1:
PV = $30,000 / (1 + 0.12)^50
PV = $30,000 / (1.12)^50
PV ≈ $2,500
Option 2:
PV = $95 (since it is already in today's value)
Comparing the two options, we see that Option 1 has a present value of approximately $2,500, while Option 2 has a present value of $95. Therefore, in terms of present value, Option 2 provides a greater value. Additionally, as you mentioned, there is uncertainty about the future and you may not be alive to enjoy the money in 50 years. Therefore, it is reasonable to choose the $95 today over the $30,000 in 50 years.