What is the interest rate that should be used to ensure a total balance of $5,000 one year now from now if you have a starting balance of $4,000? Write in the number in the blank (for example, if your answer is 5 percent then write 5)

You are thinking of getting an MBA degree after you graduate. The degree will take you two years, each of which you could have earned $40,000 at a full-time job. You will not be able to work if you attend the MBA. The program costs $20,000 in tuition and books for the first year (paid in the present, before you start) and $80,000 on tuition and books during the second year (paid one year from now). You figure an MBA degree will earn her $620,000 during the remainder of her work-life (to keep it simple, lets say you work only for a year, which starts in two years the third time period). Paulas time preference for money is associated with a per-period interest rate of 20 percent. Approximately what is the present value of going to college?

a. $100,100

b. $210,400

c. $270,500

d. $440,000

The present value formula illustrates that:

a. a decline in the interest rate will cause a decision maker to weigh recent period returns relatively more heavily than before the decline.

b. an increase in the interest rate will cause a decision-maker to weigh distant ( or future) returns relatively more heavily than before the increase.

c. the present value of a fixed sum decreases as the time until it is to be paid increases.

d. both (a) and (c).

e. none of these