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25 October, 11:41

Time value Personal Finance Problem Jim Nance has been offered an investment that will pay him $500 three years from today.

a. If his opportunity cost is 7 % 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?

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  1. 25 October, 11:57
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    a. $ 408.16

    b. $408.16

    c. Higher rate of return

    Explanation:

    a. Present value of $500 three years from today would be calculate by using the formula P V = 500 / (1+0.07) ^3 = 408.16

    b. Jim should pay not more than $408.16 to purchase this payment now.

    c. If Jim can purchase this investment for less than the amount calculated in part (a ), it means that the rate of return that he will earn is higher than the opportunity cost.
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Home » Business » Time value Personal Finance Problem Jim Nance has been offered an investment that will pay him $500 three years from today. a. If his opportunity cost is 7 % compounded annually, what value should he place on this opportunity today? b.
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