Question

4. You have been offered $3,000 in 4 years for providing $2,000 today into a business venture with a friend. If interest rates are 10%, is this a good investment for you?

Answer 1

Explanation:

To determine if this is a good investment, we can use present value calculations to see what the $3,000 payment in 4 years is worth today:

Present value of $3,000 in 4 years at 10% interest rate = $3,000 / (1 + 0.10)^4 = $2,102.50.

If we invest $2,000 today and get a payment of $2,102.50 in 4 years, our net gain would be:

Net gain = $2,102.50 - $2,000 = $102.50

Therefore, investing $2,000 today with an interest rate of 10% and receiving $3,000 in 4 years would yield a net gain of $102.50.

While any gain is better than no gain, a return of $102.50 on an investment of $2,000 over a period of 4 years may not be considered a great investment. It's up to the individual to decide whether they feel that the potential gain is worth the initial investment and risk involved.