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Suppose we need to decide if to acquire A now for \$95.24 or in one year for $100. If the opportunity cost is 5% annual, what option would you choose?

My possible solution: as the present value of \$100 is \$95.24 given the discount rate of 5%, the value of A now equals the present value of the future quantity. In this case, I would argue that the opportunity cost includes a notion of risk, and is possible that I would not get exactly $100. But I'm not sure this is correct as, mathematically, options are equivalent.

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The correct opportunity cost should already reflect things like default risk. But equivalence in your case only comes from rounding. The present value of \$100 at 5% discounting is \$95.2381, which is lower than the purchase price of \$95.24. Thus, A is too expensive today, and you would not buy it.

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  • $\begingroup$ Thanks. What would be the argument if they were the same? $\endgroup$
    – monalisa
    Feb 12 at 13:15
  • $\begingroup$ If they were the same, you'd be indifferent. And btw: The title of your question makes no sense here. $\endgroup$
    – VARulle
    Feb 12 at 13:28
  • $\begingroup$ Thank you! I will change the name $\endgroup$
    – monalisa
    Feb 12 at 14:36

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