A firm has the choice of the following investments investment A: costs $5000 tod

Question

A firm has the choice of the following investments investment A: costs $5000 today, pays a total of $4000 next year and $1700 the second year. No value beyond that. Investment B: costs $10000 today, pays $2000 next year and $9800 the second year. No value beyond that. Show which, if any, investment the firm will make if the interest rate is 10% Show which, if any, investment the firm will make if the interest rate is 5% Someone claims that the rate of return of project B is 9%. Explain whether or not you can refute this claim base only on the data from parts (a) and (b). Then set up (but do not solve) and equation that you give us an exact answer for the rate of the project.

Explanation / Answer

Investment A) Total earnings after 2 years = 4000+1700-5000= $700 $5000 invested at 10% yields $500 = (5000*0.1) after the first year and another $550 =(5500*0.1) after the second year for a total of $1050 after two years. You would be wise to not make investment A and instead let your $5000 grow at 10% interest. Unless of course you had some other ethical reason. $5000 invested at 5% yields $250 = (5000*0.05) after the first year and $263 = (5250*0.05) after the second year for a total of $513. You would be better off making investment A in the case of 5% interest. Investment B) (if I am reading correctly, it’s a bit blurry) Total earnings after 2 years = 2000+9800-10000= $1800 At 10% interest 10000 would earn $1000 after its first year and another $1100 after its second year for a total earned of $2100. You would obviously make more money letting it grow at 10%. At 5% interest 10000 would earn $500 after year one and $525 after year 2 for a total of $1025. Investment B will make more $$$ than investing at a 5% rate. You can find the rate of return for investment B using the data given in the problem. Check it out: The rate of return for investment B we will call “r” 2100 = (10000)*r + (10000+(10000*r))*r use algebra to simplify that.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.