Answer:
Option 1 is more preferable.
Step-by-step explanation:
As provided, the two options are:
Option 1
$5,000 today and $5,000 next year
The prevailing interest rate is 10%
Therefore, present value of this option
= [tex]\frac{1}{(1 + 0.1)^0} \times 5,000 + \frac{1}{(1 + 0.1)^1} \times 5,000[/tex]
= [tex]5,000 \times 1 + 5,000 \times 0.909 = 9,545[/tex]
Option 2
Receiving $9,000 today straight once for all the dues.
Its present value shall be
[tex]\frac{1}{(1 + 0.1)^0} \times 9,000[/tex]
= 9,000
Since the net present value is more of option 1, the Option 1 shall maximize the value by $545 extra = $9,545 - $9,000
