Characters in the following example:•Chief actor ~ S.S.Yeung

•Chief actress ~ Joey

•Minor role ~ a pretty dog

• Joey is a famous singer

• She is 22 years old

• Now, she has 2 ways to make money

• She can only choose either one of the following

(1) Continue to be a singer for 5 years

She can gain 1 million dollars each year

Then she can get 5 million dollars 5 years later

(2) She is paid to be the mistress of S.S. Yeung

Joey can gain 6 million dollars after being his mistress for 5 years

Present value ~~The value now of a sum of money arising in the future. Money now is worth more than money in the future because it can be invested now to produce a greater sum in the future.

Discounted value (To be a singer):

Discounted value (being Yeung’s mistress):

51.01

11

1.0

1000000

51.01

6000000

=$3790787

=$3725528

As a wealth maximizer, she will choose the option which generate the largest discounted value of the income stream acquired.

So she will continue to be a singer which can generate more discounted value of income.

However, Mr. Yeung loves Joey very much, he is thinking of how to make Joey change her decision.

•Interest rate

•Future receipt

•Time period

1.Interest rate

51.01

6000000

=$47011560.05

51.01

11

1.0

1000000

0.05 0.05

=$4329477

Present value of being a singer:

Present value of being Yeung’s mistress:

2. Future receipt

51.01

11

1.0

1000000=$3790787

Present value of being a singer:

Present value of being Yeung’s mistress:

51.01

6000000

7000000

=$4346449

3. Time period

51.01

11

1.0

1000000

Present value of being a singer:

Present value of being Yeung’s mistress:

=$3790787

=$4098081 51.01

6000000

4

In conclusion, as Mr. Yeung can’t affect the interest rate, he only can use 2 ways (shorten the time period and increase the future receipt) to make Joey change her decision.

Yeah!Joey has changed

her decision.