Final answer:
The best investment opportunity based on the provided scenario is for all discount rates higher than 15%. The IRR must exceed 15% to be considered a better investment opportunity considering the financial investor's chosen rate.The correct answer is option 4.
Step-by-step explanation:
The Internal Rate of Return (IRR) is a financial metric used to evaluate the profitability of potential investments. It is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
When a financial investor considers the best investment opportunity based on IRR, they need to choose an investment that has a higher IRR than their own discount rate, which includes a risk premium. In the scenario provided, the financial investor determines that the appropriate interest rate to value future payments is 15%.
This means that for the investment to be attractive, the IRR should be higher than 15%. Therefore, among the given options, the correct answer is Option 4: 15%.
To illustrate the concept of compound interest as another financial principle, consider a young individual starting to save money at age 25. If they save $3,000 into an account with a 7% real annual rate of return, after 40 years, this initial investment will grow substantially due to the power of compound interest.
The original $3,000 saved, compounded annually at 7%, would increase to $44,923 after 40 years. This example demonstrates the importance of starting to save early and allowing investments to grow over time.The correct answer is option 4.