Problema Solution
You are considering investing in a security that will pay you $4000in 29 years.
a. If the appropriate discount rate is 11percent, what is the present value of this investment?
b. Assume these investments sell for $746 in return for which you receive $400 in 29 years. What is the rate of return investors earn on this investment if they buy it for $746
Answer provided by our tutors
I = $4,000
t = 29 years
r = 11% or 0.11
We are assuming that the interest is simple.
a.
P = the present value
I = P*r*t
4,000 = P*0.11*29
P*0.11*29 = 4000
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click here to see the equation solved for P
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P = $1,253.92
The present value of the investment is $1,253.92.
b.
P = $746
I = $400
t = 19 years
r = the rate of return as decimal
I = P*r*t
746*r*29 = 400
........
click here to see the equation solved for r
........
r = 0.0185 or 1.85%
The rate of return is 1.85%.