Question

Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?

A. The present values of Luis and Soo Lee's money are equal.
B. In future dollars, Soo Lee's money is worth more than Luis's money.
C. In today's dollars, Luis's money is worth more than Soo Lee's.
D. Twenty years from now, the value of Luis's money will be equal to the value of Soo Lee's money.
E. Soo Lee's money is worth more than Luis's money given the 7 percent discount rate.

Answer 1

Answer:

The answer is C. In today's dollars, Luis's money is worth more than Soo Lee's.

Explanation:

Present value for Luis= C(1+i)^-n= 20000(1.07)^-6 = $13326.84

Present value for Soo Lee = C(1+i)^-n= 20000(1.07)^-9= $10878.67

Present value for Luis is greater than that of Soo Lee.