Khanyisile owns a fabric store and offers a curtain-making service to her customers. The industrial machine used to sew the curtains has broken down and Khanyisile needs to decide if it is worth it to replace the machine right now.

A new machine is worth R50 000, but she does not really have the capital now to replace the machine. Her brother owns such a machine and has indicated that he will give it to her now with payment only due in three years. He is willing to let her take the machine for R75 000 at an interest rate of 15% per year.

She has approached you to assist her and you advise her that she will need to look at the present value of the machine before deciding. Given the high decrease of the discounting factors along with the high interest rates offered on the machine and the long time period she will require to pay off the machines, the following is correct:

Select one:

a.

The lower the interest rate is, the smaller the present value of a given future amount will be.

b.

The higher the interest rate is, the bigger the present value of a given future amount will be.

c.

The higher the interest rate is, the smaller the present value of a given future amount will be.

d.

The lower the interest rate is, the bigger the present value of a given future amount will be.