Explain whether you would prefer to have 225 today or wait f

Explain whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work.

Solution

i) The value of $300 in 5 years at a rate of 2% will be (300/1.02) x 5 = $ 271.71 (approx) but at 8 % the value in 5 years will be (300/1.07) x 5= $ 213.90 (approx).

Therefore, now it is very clear that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate only.