You are offered an investment that pays $150 in 3 years, $250 in 4 years, and...

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You are offered an investment that pays $150 in 3 years, $250 in 4 years, and $1010 in 10 years. You can borrowlinvest at 6.6

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Answer 1

Answer #1

Answer-

We have to calculate the Present Value of all these investments by discounting it at 6.6 % and add them
Disount = 6.6 %
Discount = ( 1+ 6.6%) = ( 1 + 0.066) = 1.066

Investments

1st investment

Investment = $ 150 in 3 years
Present value = $ 150 / (1.066)3
Present value = $ 150 / 1.2113
Present value = $ 123.83

2nd investment

Investment = $ 250 in 4 years
Present value = $ 250 / (1.066)4
Present value = $ 250 / 1.2913
Present value = $ 193.6

3rd investment

Investment = $ 1010 in 10 years
Present value = $ 1010 / (1.066)10
Present value = $ 1010 / 1.89484
Present value = $ 533.03

The combined value of all these investments = $ 123.83 + $ 193.6 + $ 533.03 = $ 850.46

If one is offered a price of $ 845 for the above investment he/she should not accept the offer as the above offer yields $ 850.46 which is higher than $ 845.

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Answer 2

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