Final answer:
The price at which the investment should sell for to provide a 14% return is calculated using the discounted cash flow method and is determined to be $14,210.05. This accounts for the present value of the future cash flows of $10,000, $5,000, and $2,500 using a discount rate of 14%.
Step-by-step explanation:
The investment question requires us to calculate the current value of future cash flows using the discounted cash flow (DCF) method. Considering an investor requires a return of 14%, we're looking to find out what price the investment should sell for to meet this required rate of return.
To calculate the present value of each cash flow, we can use the formula PV = CF / (1+r)^n, where PV is the present value, CF is the cash flow in a given year, r is the required rate of return, and n is the number of periods.
Present Value calculations:
PV of $10,000 in one year: $10,000 / (1 + 0.14)^1 = $8,771.93
PV of $5,000 in two years: $5,000 / (1 + 0.14)^2 = $3,847.95
PV of $2,500 in three years: $2,500 / (1 + 0.14)^3 = $1,590.17
The total present value of the investment is the sum of the present values of all future cash flows: $8,771.93 + $3,847.95 + $1,590.17 = $14,210.05. Thus, the investment should sell for $14,210.05 to provide a 14% return.