Question

Please do the question manually and show all of your work! The correct answer is not helpful without the steps. Please and many thanks!

Question 4 5 points Ida was just about to purchase of a painting at a gallery for $50,000. She was not a fan of the art itself, but figured it would appreciate, as the artist was gaining increasing publicity. She was approached by Harry, who seemed distraught and disappointed. Harry introduced himself and then made an unexpected offer to Ida. “I do not have enough cash today to buy the painting," Harry said. But he continued, "If you buy it, I'd like to execute a contract to buy the painting back from you in three and a half (3.5) years for $68,000.” Ida knew that, if she did not use her money to buy the painting, she could instead invest it that same day. What annual rate would she have to receive if she invested her cash to get the same return as the art deal with Harry? To pose the same question differently, what discount rate would Ida have to use to be indifferent between (i) buying the painting and signing the resale contract with Harry and (ii) not buying the painting and investing her $50,000 instead? O A. OB. O C. O D. 9.18% 8.96% 4.48% 0.86% 0.73% E.

Answer 1

let the indifferent rate be x

Present value (1+Interest rate)^Number of years = Future value

50,000(1+x%)^3.5 = 68,000

(1+x)^3.5 = 1.36

x = 9.1830%

Hence, the answer is A.9.18%