A Customer Makes Two Offers to Settle a Disputed Account

question 30

Multiple Choice

A customer makes two offers to settle a disputed account. He will either pay you $500 today or pay you $650 in three years. Which one of the following is correct if your company earns 10.5% on its surplus funds?

• A) The company should accept the $650 offer as it pays $150 more.
• B) The company should accept the $650 offer as it is worth more today.
• C) The company should accept the $650 offer as it is worth $12.42 more today.
• D) The company should accept the $500 offer as it is worth $18.24 more today.
• E) The company should accept the $500 offer as it is worth $512.42 today.

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Definitions:

Futures Contract

A legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.

Long Position

The futures trader who commits to purchasing the underlying asset.

Short Position

An investment strategy where an investor sells borrowed securities with the expectation of buying them back at a lower price to make a profit.

Agricultural Futures

Contracts to buy or sell agricultural commodities, such as wheat, corn, or soybeans, at a predetermined price on a specified future date, used for hedging or speculative purposes.