Question

You are buying an investment product that costs $50,000 today. The annual interest rate is 5% and the investment period is 3 years. The investment will repay you $15,000 at the end of year 1 and $10,000 at the end of year 2. Based on economic equivalent value of the investment, how much should you receive at the end of year 3? Round the answer to the nearest integer. (e.g. round 10.25 to 10, round 10.78 to 11)

Answer 1

year 3 cashflow: 23,212

Step-by-step explanation:

economic equivalent value of the investment: This means the investment will have a return of 5%. Si we must calculate which cahs flow makes the NPV equal to zero.

`50,000 = (10,000)/(1.05)+(15,000)/((1.05)^(2))  +(x)/((1.05)^(3))`

We should solve for "x"

`50,000 - (10,000)/(1.05)-(15,000)/((1.05)^(2))  =(x)/((1.05)^(3))`

`26,871  =(x)/(0.863837599)`

`26,871*0.863837599 =x`

x = 23,211.96268 = 23,212

The third cashflow will need to be of 23,212 to make the investment equivalent at 50,000 at 5% discount rate.