Jim Nance has been offered an investment that will pay him 3

Jim Nance has been offered an investment that will pay him $350 three years from today. a. If his opportunity cost is 8?% compounded? annually, what value should he place on this opportunity? today?? b. What is the most he should pay to purchase this payment? today?? c. If Jim can purchase this investment for less than the amount calculated in part ?(a?), what does that imply about the rate of return that he will earn on the? investment?

Solution

a. value of this opportunity = 350/1.08^3 = 277.84

b. the most he should pay = 277.84 (same as the value)

c. it means than the investment will provide a rate of return that is higher than the required rate of return of 8%