Question

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?

Answer 1

a. $ 408.16

b. $408.16

c. Higher rate of return

Step-by-step 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.