a.In this example why is $100 only worth $9.23 today ?

b. Discounting: If we increased the length of time involved would this present value increase or decrease ?

c. Compounding: If the going rate of the savings certificate increased above 10% what would happen to the future value of the certificate ? Would it be above or below $100?

d. Ethics: Is this scenario deceptive advertising?Why or why not ?

Chapter 5 Introduction to Valuation The ie val Deceptive Advertising? EXAMPLE 5.7 Businesses sometimes advertise that you should "Come try our product. If you do, we'l Busitlou $100just for coming by!" If you read the fine print, what you find out is that they guil aive you a savings certificate that will pay you $100 in 25 years or so. If the going in- terest rate on such certificates is 10 percent per year, how much are they really giving you today? What you're actually getting is the present value of $100 to be paid in 25 years. If the discount rate is 10 percent per year, then the discount factor is: 1/1.125 1/10.8347 0923 This tells you that a dollar in 25 years is worth a little more than nine cents today, assuming a 10 percent discount rate. Given this, the promotion is actually paying you about 0923 x $100 $9.23. Maybe this is enough to draw customers, but it's not $100