Question

Your uncle offers you a choice of \(105,000 in 10 years or \)47,000 today. If money is discounted at 9 percent, which should you choose?

Short answer

The choice of $47,000 today should be preferred over $105,000 in 10 years.

Step-by-step solution

Identification of the required information

Future value (FV) = $105,000

Interest Rate (i) = 9%

Period (n) = 10 year

Present value (PV)

$$\begin{gathered} \text{PV}\mathbf{=}\text{FV}\times {\left(1+i\right)}^{-n} \\ \mathbf{=}\$105,000\times {\left(1+9\%\right)}^{-10} \\ \mathbf{=}\$44,353.13 \end{gathered}$$

Final decision

The present value of $105,000 in 10 years is $44,353.13 which is lower than $47,000 today. Thus, the option of $47,000 today should be chosen.