File Edit View History Bookmarks Develop Window Help Laulima

File Edit View History Bookmarks Develop Window Help Laulima: WDA BUSA-32/ECON-321-MyFinancelab Chegg Study I Guided Solutions and Study Hep Chegg.com Homework: HOMEWORK #3-Chapter 5 Save Score: 0 of 2 pts 8 of 21 (21 complete) Hw Score: 82.86%, 29 of 35 pts P5-13 (similar to) Question Help Time value Personal Finance Problem Jim Nance has been offered an investment that will pay him a his opportunity $270 three yoars from today cost is 8% compounded annually. what value should he place on this bWhat is the most he should pay to purchase this payment today? ennty . If Jim can purchase this investment for less than the amount calculated in part (a eam on the investment , what does that imply about the rate of retum that he will a. The value Jim should place on this oppontunity today s (Round to the nearest cent )

Solution

a) We are given the future value (after 3 years) of an investment as $270. According to the question, this is compounded annually at 8% interest rate. The present value can be estimated as, PV=FV/(1+r)^t

PV= 270/(1+0.08)^3  

= 270/1.26 =$214.29

Jim should place value of $214.29 today for the given opportunity.

b) Since, the future value of this investment = $270,the maximum Jim should pay is this amount itself, I.e.,$270 (which considers the case that there\'s 0 return on investment). If he pays more than that, it means he has suffered a loss, as the cost of investment will be then higher than the future yield of investment.

c) In part a), for purchasing the investment, Jim has to pay $214.29. So the rate of return = (270-214.29)/214.29 = 0.26 approx.

If the purchase amount for same investment is lower, say P < 214.29, then (270-P) > (270-214.29), giving us a higher rate of return.