Bus 640 Week 1

A generous university benefactor has agreed to donate a large amount of money for student scholarships. The money can be provided in one lump-sum of 10mln, or in parts, where can be provided in year 1, and another can be provided in year 2.

a) Assuming the opportunity interest rate is 6%, what is the present value of the second alternative?

According to Douglas, "a dollar received in the present period is worth more than a dollar received in a future period" (2010, ch. 1.4). The reasoning behind this is that an amount received today can be deposited into a bank and earn interest. Therefore an amount received in a year, for example, is valued less today, and conversely, an amount received today is valued to be more in a year from now.

For this...