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. Which of the three women made the right choice? Explain​

Answer 1

Vida

Step-by-step explanation:

you have two options:

• 1,000 today
• 3,000 in three years

in order to compare both options we must equal the present value of the cash flow in three years (3,000) with the present cash flow of 1,000

the formula for calculating present value:

PV = future value / (1 + r)ⁿ

1,000 = 3,000 / (1 + r)³

(1 + r)³ = 3,000 / 1,000 = 3

∛(1 + r)³ = ∛3

1 + r = 1.4422

r = 1.4422 - 1 = 44.22%

I'm not sure what type of currency GH¢, but a 44.22% annual return is very high, so I guess that Vida made the right choice.