The Time Value of Money

Please read on textbook Page 141: EXAMPLE 5.7

Deceptive Advertising?

Businesses sometimes advertise that you should Come try our product. If you do, we'll give you $100 just for coming by! If you read the fine print, what you find out is that they will give you a savings certificate that will pay you $100 in 25 years or so. If the going interest 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 $100 = $9.23. Maybe this is enough to draw customers, but it's not $100.

Ethical Considerations: Take a look back at Example 5.7. Is it deceptive advertising? Is it unethical to advertise a future value like this without a disclaimer?

QUESTION :

Have you ever seen an advertisement or experienced a situation like this, where a monetary offer has been made, yet the "fine print (disclaimer)" discloses that the actual monetary amount involved may be different from its "initial appearance?"