Your trust fund will pay you $100,000 in six years when you turn 25. A shady financial institution has encouraged you to sign away the rights to your trust fund in exchange for cash today
Would you prefer that the financial institution use a discount rate of 8% or 10% to determine the value of your lump sum payment? Why?
A) Use 8% because the lump sum payment of $62,741 is greater than the 10% discounted value of $55,839.
B) Use 10% because the lump sum payment of $62,741 is greater than the 10% discounted value of $55,839.
C) Use 8% because the lump sum payment of $63,017 is greater than the 10% discounted value of $56,447.
D) Use 10% because the lump sum payment of $63,017 is greater than the 10% discounted value of $56,447.
Answer: C
Explanation: C) PV = = = $63,016.96, whereas = $56,447.39
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