**Investment Valuation and Return Rate Calculation**When considering an investment, it is essential to understand the present value of that investment and the potential rate of return. This exercise demonstrates these concepts using a practical example.**Example Scenario:**You are considering investing in a security that will pay you $2,000 in 28 years.1. **Present Value Calculation:** **Problem Statement:** If the appropriate discount rate is 12 percent, what is the present value of this investment? **Solution:** To find the present value (PV) of the investment, use the present value formula: \[ PV = \frac{FV}{(1 + r)^n} \] where: - $ PV $ = Present Value - $ FV $ = Future Value ($2,000) - $ r $ = Discount rate (12% or 0.12) - $ n $ = Number of years (28)2. **Rate of Return Calculation:** **Problem Statement:** Assume these investments sell for $853 in return for which you receive $2,000 in 28 years. What is the rate of return investors can earn on this investment if they buy it for $853? **Solution:** To find the rate of return, use the future value formula rearranged to solve for $ r $: \[ FV = PV \times (1 + r)^n \] \[ r = \left( \frac{FV}{PV} \right)^{\frac{1}{n}} - 1 \] where: - $ FV $ = Future Value ($2,000) - $ PV $ = Present Value ($853) - $ n $ = Number of years (28)**Questions:**a. If the appropriate discount rate is 12 percent, the present value of this investment is $ \_\_\_ (Round to the nearest cent.)b. The rate of return investors can earn on this investment if they buy it for $853 is \_\_\_ % (Round to two decimal places.)By understanding these calculations, you can make more informed decisions about potential investments and their value over time.

Future value = $2000Period = 28 yearsDiscount rate = 12%

(Related to Checkpoint 5.6) (Solving for ) You are considering investing in a security that will pay you $2,000 in 28 years. a. If the appropriate discount rate is 12 percent, what is the present value of this investment? b. Assume these investments sell for $853 in return for which you receive $2,000 in 28 years. What is the rate of return investors earn on this investment if they buy it for $853? a. If the appropriate discount rate is 12 percent, the present value of this investment is $. (Round to the nearest cent.) b. The rate of retum investors can earn on this investment if they buy it for $853 is%. (Round to two decimal places.)

(Related to Checkpoint 5.6) (Solving for ) You are considering investing in a security that will pay you $2,000 in 28 years. a. If the appropriate discount rate is 12 percent, what is the present value of this investment? b. Assume these investments sell for $853 in return for which you receive $2,000 in 28 years. What is the rate of return investors earn on this investment if they buy it for $853? a. If the appropriate discount rate is 12 percent, the present value of this investment is $. (Round to the nearest cent.) b. The rate of retum investors can earn on this investment if they buy it for $853 is%. (Round to two decimal places.)

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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By using formula please;;
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you that will pay you $100,000 when you turn 25. If the relevant discount rate is 11 percent, how much is this fund worth today? (See Problem 3.) Calculating Rates of Return You've been offered an investment that will double your money in 12 years. What rate of return are you being offered? Check your answer using the Rule of 72. (See Problem 4.) 4.3 Calculatin
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You want to make an investment that will yield a lump sum of $ 90,397 in 3 years. You will invest at a nominal rate of 18 %. How much do you need to invest today to reach the above future value? Record your answer as a dollar amount rounded to 2 decimal places , but do not include a dollar sign or any commas in your answer . For example , enter $ 12,327.24987 as 12327.25 .
(Related to Checkpoint 5.6) (Solving for) You are considering investing in a security that will pay you $4,000 in 31 years. a. If the appropriate discount rate is 10 percent, what is the present value of this investment? b. Assume these investments sell for $2,062 in return for which you receive $4,000 in 31 years. What is the rate of return investors earn on this investment if they buy it for $2,062? C a. If the appropriate discount rate is 10 percent, the present value of this investment is $. (Round to the nearest cent.)
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