question 20 chang lee is going to receive $20,000 six years from now. sao lee is going to receive $20,000…

question 20 chang lee is going to receive $20,000 six years from now. sao lee is going to receive $20,000 nine years from now. which one of the following statements is correct if both individuals apply a discount rate of 7 percent? a the present values of chang lees and sao lees money are equal. b in future dollars, sao lees money is worth more than chang lees money. c in todays dollars, chang lees money is worth more than sao lees. d twenty years from now, the value of chang lees money will equal the value of sao lees money. e sao lees money is worth more than chang lees money given the 7 percent discount rate. 1.5 points

question 20 chang lee is going to receive $20,000 six years from now. sao lee is going to receive $20,000 nine years from now. which one of the following statements is correct if both individuals apply a discount rate of 7 percent? a the present values of chang lees and sao lees money are equal. b in future dollars, sao lees money is worth more than chang lees money. c in todays dollars, chang lees money is worth more than sao lees. d twenty years from now, the value of chang lees money will equal the value of sao lees money. e sao lees money is worth more than chang lees money given the 7 percent discount rate. 1.5 points

Answer

Explanation:

Step1: Recall present - value formula

The present - value formula is $PV=\frac{FV}{(1 + r)^n}$, where $PV$ is the present value, $FV$ is the future value, $r$ is the discount rate, and $n$ is the number of periods. For Chang Lee, $FV_{Chang}=20000$, $n_{Chang}=6$, and $r = 0.07$. So, $PV_{Chang}=\frac{20000}{(1 + 0.07)^6}$. For Sao Lee, $FV_{Sao}=20000$, $n_{Sao}=9$, and $r = 0.07$. So, $PV_{Sao}=\frac{20000}{(1 + 0.07)^9}$.

Step2: Compare present values

Since $(1 + 0.07)^9>(1 + 0.07)^6$, then $\frac{20000}{(1 + 0.07)^6}>\frac{20000}{(1 + 0.07)^9}$. That is, $PV_{Chang}>PV_{Sao}$. In future dollars, Sao Lee's money is worth less than Chang Lee's money in present - value terms. In today's dollars, Chang Lee's money is worth more than Sao Lee's.

Answer:

C. In today's dollars, Chang Lee's money is worth more than Sao Lee's.