ou’re trying to choose between two different investments, both of which will cost $65,000 today. Investment A will give you $125,000 in 6 years and Investment B will give you $205,000 in 10 years. Which of the two investments should you choose? Why? How will your answer change, if any, if interest rates are expected to increase over the next 10 years. (Explain using the appropriate equations and show all work)
ou’re trying to choose between two different investments, both of which will cost $65,000 today. Investment A will give you $125,000 in 6 years and Investment B will give you $205,000 in 10 years. Which of the two investments should you choose? Why? How will your answer change, if any, if interest rates are expected to increase over the next 10 years. (Explain using the appropriate equations and show all work)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
You’re trying to choose between two different investments, both of which will cost $65,000 today. Investment A will give you $125,000 in 6 years and Investment B will give you $205,000 in 10 years. Which of the two investments should you choose? Why? How will your answer change, if any, if interest rates are expected to increase over the next 10 years.
(Explain using the appropriate equations and show all work)
Expert Solution
Step 1
Future Value:
The futue value of an investment is its value at the end of the investment period.
The future value depends on the investment period and the prevailing interest rates.
When the amount invested, investment period and the future value are known, the rate of interest earned can be determined.
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