A gooddeal broker offers you the following gooddeal If you g

A good-deal broker offers you the following good-deal. If you give him $4,000 at the end of each year for the next 15 years, he will give you $125,000 at the end of 15 years. If money is worth 10% per year to you, is this a good deal? How much should he give you at the end of 15 years for you to be indifferent?

Solution

a) Broker offers me $125000 at the end of 15 years. so to find out whether it is a good deal or not what i have to do is compare the future value of both stream of payments and if $125000 is more than paying $4000 yearly then its a good deal.

F. V = $4000(1.1)¹⁴+$4000(1.1¹³) ...................... +$4000(1.1) + $4000

= $111900(approx.)

so this is less than $125000 hence it is a good deal .

b.) For me to be indifferent if he pays me the equivalent amount of the future value of my payments then i will be indifferent.so for me to be indifferent he has to pay me $111900.