Esther, Vida, and Clair were asked to consider two different cash flows: GH¢1000 that they could receive today and GH¢3000 that would be received 3 years from today. Esther wanted the GH¢1000 today, Vida chose to collect GH¢3000 in 3 years, and Clair was indifferent between these two options. Which of the three women made the right choice?

They all make the right choice

Step-by-step explanation:

Esther made the right choice by wanting to collect the GH¢1000 today because her rent will be due the following day and this keeps her from being evicted from her apartment.

Vida also made the right choice, because Vida choose to collect the GH¢3000 means that at the current rate of return, the future value of the 1,000 will be far less than the 3,000 she will get.

And Clair made the right choice, because she was indifferent between the two options available reason been that she is already wealthy in which neither the amount will improve her lifestyle.

Thereofere People can choose to make financial choices depending on their circumstances or situation in which they are in.

In a situation where people have different circumstances, hence there is no "right choice" that will meets all of their circumstances.

Example

Let Assumu that the discount market rate is currently 20%

Therefore the Future Value of GH¢3000 after 3 years will be :

Year 1

Interest Factor (IF) = (I+r)-t

IF = (1+0.2)^-1

IF = 1.2^-1

IF = 0.8333333333

Year 2

IF = (1+0.2)^-2

IF = 1.2^-2

IF = 0.6944444444

Year 3

IF = (1+0.2)^-2

IF = 1.2^-3

IF = 0.578703703

The Amount will be :

3,000 * 0.578703703= 1,736.11111

Hence If Esther try to invests the money at the market rate of 20%, she will receive the following

Year 0 = 1,000

Year 1 = 1,000*0.8333333333=833.33333333

Year 2=1,000 *0.6944444444 = 694.44444444

Year 3 = 1,000 *0.578703703= 578.703703

Total 2106.4814

This means that after 3 years, Esther would receive an amount that would be equal to 2106.4814 at 20% interest rate while Vida’s amount would as well be equal to 1,736.11111 which is far less than the investment gain of the amount Esther’s has . Which is why it be advisable to take the money and invest the same instead of waiting to receive 3,000 after 3 years because from the above example I made it is can easily be seen that the value will reduce in which it is Vida who will get less than the GH 3,000 currency.

true

step-by-step explanation: