Question 1
a. 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? Explain. (10
marks).
b. You bought a sachet water machine from Indie Inc. The cost of the machine was GH¢35,000.
At that time, you asked for the payment to be deferred, and a contract was written. Under the
contract, you could delay paying for the sachet water machine if you purchased the material for
packaging the water from Indie Inc. You will then pay for the machine in a lump sum at the end
of 2 years, with interest at a rate of 2% per quarter-year. According to the contract, if you ceased
buying the packaging material from Indie Inc. at any time prior to 2 years, the full payment due
at the end of 2 years would automatically become due. One year later, you decided to buy the
packaging material elsewhere and stopped buying from Indie Inc., whereupon Indie Inc., per
the contract terms, asked for the full payment that is due at the end of 2 years to be paid
immediately. You were unhappy about this, so Indie Inc. offered as an alternative to accept the
GH¢35,000 with interest at 10% per semiannual period for the 12 months that you had been
buying the packaging material from Indie Inc. Which of the alternatives should you accept?
Explain. (10 marks)