Learning Goal: I’m working on a business writing question and need the explanation and answer to help me learn.
1. Historically, many cultural groups have outlawed usury, or the practice of levying interest on loans. Some groups oppose usury because it exacerbates problems of income inequality (as wealthier individuals can afford to lend to poorer individuals), while others claim investment and loans should be made charitably. Evaluate these arguments against usury based on your knowledge of present value. Do such prohibitions make sense? 2. Suppose that you have a winning lottery ticket for $100,000. The State of California doesn’t pay this amount up front – this is the amount you will receive over time. The State offers you two options. The first pays you $80,000 up front and that will be the entire amount. The second pays you winnings over a three year period. The payment options are detailed in the table below:
|
Option #1 |
Option #2 |
|
|
Amount paid today |
$80,000 |
$50,000 |
|
Amount paid after 1 years |
– |
$12,000 |
|
Amount paid after 2 years |
– |
$12,000 |
|
Amount paid after 3 years |
– |
$12,000 |
Compute the present value of each payment option, assuming the interest rate is 12%. Now, compute the present values based on an interest rate of 5%. Compare your answers, explaining why they are different when the interest rate changes.
