Suppose That the Present Value of Receiving a Guaranteed R450

question 54

Multiple Choice

Suppose that the present value of receiving a guaranteed R450 in two years is R385.80.The opportunity rate of return on similar risk investments is 8 percent.According to this information, all else equal, which of the following statements is correct?

• A) It always would be preferable to wait two years to receive the R450 because this value is greater than the present value.
• B) Risk averse investors always would prefer to take the R385.80 today because it is a guaranteed amount whereas there is uncertainty as to whether the future amount will be paid.
• C) No investor should be willing to pay more than R385.80 for such an investment.
• D) It is apparent the present value was computed incorrectly because the present value of a future amount always should be greater than the future value.
• E) None of the above is a correct answer.

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