Question
A friend of yours hasn't taken this course and therefore does not appreciate the time-value of money. He offers to pay you back for that
A friend of yours hasn't taken this course and therefore does not appreciate the time-value of money. He offers to pay you back for that time he borrowed money and gives you two options:
- Option 1: Two equal payments of $1,200, today and in 6 years.
- Option 2: One single payment of $2,400 (twice the amount) in 3 years.
Now, because you appreciate the time-value of money, you realize that, while the two options appear to have equal value, the two-payment option has a greater value. Assume money can earn 6.5% compounded monthly. Use today as your focal date and determine: a) The economic value of payment plan option 1 today. b) The economic value of payment plan option 2 today. c) The difference between the values of the two payment plans.
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