Question

Suppose you have a real estate opportunity that requires $100,000 investment today but will pay you $250,000 in 8 years. What interest rate, r, would you need so that the present value of what you get is equal to the present value of what you give up?

a.) 10.135% b) 11.135% c) 12.135% d) 9.135%

please show work on how you answered each!

Answer 1

Future Value = Present Value * ( 1+ Rate of Interest ) ^ Time

$ 250,000 = $ 100,000 * ( 1+ Rate of Interest )^ 8

[($ 250,000 / $ 100,000) ^ (1/8)] - 1 = Rate of Interest

Rate of Interest = 12.1353392%

Hence the correct answer is c) 12.135%