You have won a contest and are allowed to choose between two prizes. O

You have won a contest and are allowed to choose between two prizes. One prize is $200 today and another $200 one year from now. The other prize is $100 today and an additional $325 one year from now.

At what interest rate (if any) would you be indifferent between the two prizes?

ANSWER

Prize 1 has PDV = 200 + [200/(I + R)]
Prize 2 has PDV = 100 + [365/(I + R)]
Equating the PDV for prize 1 and prize 2 and solving for R yields:
200 + [200/(l + R)] = 100 + [365/(l + R)]
R = 0.25