Answer to Question #122999 in Financial Math for prince

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

Given that Esther collect GH1000

Vidha collect GH3000

Therefore, supposing the market rate is currently 10%

To get the future value of GH3000, we have,

Year 1= 0.909091,

Year 2 = 0.826446

Year 3

$0.751315\times3000 = 2253.945$

Then assume Esther with GH1000, invested at the rate of 10%

Year 1

$0.909091\times1000 = 909.0909$

Year 2

$0.826446\times1000 = 826.4463$

Year 3

$0.751315\times1000 = 751.3148$

Total: 2486.852

Being indifference is not a smart choice either, as Clair could still pick the GH¢3000 in 3 years in stead of GH¢1000 now. Hence, it is apparent that out of the three Esther made the best decision as she has the highest money in value at the end of the 3 years.