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?

Question

Mila Gentry

Business

14 October, 12:54

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?

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Answers (1)

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Stanton · Answer 1

Esther, Vida, and Clair vs Two Different Cash Flows:

Esther made the right choice.

Explanation:

There are many factors to be considered before Esther, Vida, and Clair could decide in order to collect GH¢3000 in 3 years. What assurance exists that they will be given the GH¢3000 in 3 years? There could be a financial failure or distress on the part of the promisor. This will cause him to renege on his promise. Secondly, the promisor could die before 3 years, making it impossible for him to fulfil his promise.

Thirdly, Esther, Vida, and Clair must consider if there was a valid and legally enforceable contract between them and the promisor so that they could wait to collect the GH¢3000 in 3 years. Where such a contract does not exist, it appears more beneficial for the three to collect the GH¢1000 today.

Fourthly, the theory around the time value of money states that money received today is worth more than the same amount received some years from now. In this case, the amounts involved are not the same. However, Esther, Vida, and Clair could still collect the GH¢1000 today and invest it in a business to realize more than GH¢3000 in three years.