Answer to Question #124271 in Financial Math for Kenn Odamtten

Question

Esther, Vida, and Clair were asked to consider two different cash flows: GH¢1000 that they could receive today and GH¢3000 that would be received 3 years from today. Esther wanted the GH¢1000 today, Vida chose to collect GH¢3000 in 3 years, and Clair was indifferent between these two options.

Answer 1

$\text{Esther made the right option which gives her maximum value at the end of 3 years than Vida and Clair.}$$\text{ Esther has made a decision to collect GH¢1000 now. }$

$\text{To calculate future value of Esther choice at the end of 3 year we will use formula below}$

$FV = PV (1 + r)^{t}$

$\text{Discount at year 3 is 10}$% $\text{ is 0.751}$

$\text{ Future value will be ;}$

$FV = GH¢2487.$

$\text{Vidha choose to collect GH¢3000 at end of 3 year}$

$\text{The present value of GH¢3000 at 10}$ %$\text{ discount rate will be;}$

$PV = FV (1 + r)^{-t}$

$PV = 3000 (0.751)$

$PV = GH¢2253.$

$\text{Clair is indifferent from the choices given but this is also not a smart choice.}$

$\text{Esther has made the right choice among the three women , }$$\text{she gets maximum value}$ of$\text{ GH¢2487.}$