True or False? You have two options, which do you prefer? With a calculator: Option 1: --OR-- Option 2: Calculator Method 1)Assume you want the more valuable option and assume that you've memorized (for life) the equation on page 45, Now, which option is bigger? Option 1: Option 2: $110 Option 1 is bigger. You’d prefer option 1 is preferred. True. Calculator Method 2)Alternatively, you can use the equation you know and love on page 49, calculate the ‘net-present value’ of option two. Option 1: Option 2 : Worth $110 in five years Clearly the $100 today is better than the equivalent of $86 today. You prefer option 1. True. Now – Without A Calculator You should be able to look at the options and know the first option is better. Say you get option 1, you get $100 today, at 5% interest. - Year 1) If you wanted to, you could put that cash in the bank, this year you’d earn 5%, or an extra $5 for a total of $105.
- Year 2) Next year, you’d earn 5% on your $105. So you’d earn over $5. You’re balance now more than $110.
- Year 3) The following year (year 3), you’d earn another 5% on that +$110. So, with compound interest you’d have Over $115 in the bank.
- Year 4) ...and so on...
- Year 5) After 5 years you can assume you’d have over $125.
Making it clear Option 1 is the better of the two options. -----TRUE! |

Teaching - Curtis Kephart > Econ 100B Intermediate MacroEconomics (Homework and exam examples) >