Question

Question 3 Lara Beal allocates wealth between two periods: youth and old age. Currently (in her youth) she has $8,000 in cash. She can lend and borrow at the bank at 15% (that is, lending $1 in youth will give her $1.15 in old age). Her only investment opportunity other than the bank is a project that costs $5,000 now in her youth and has a payoff of $6,000 in her old age. What is the most she can consume in her old age

Answer 1

The correct answer is "$9450".

Step-by-step explanation:

Given:

Payoff from investment,

= $6000

Lending to bank,

=
`8000-5000`

=
`3000`

Now,

At 15% interest,

The amount to be received from bank will be:

=
`3000* (1+(15)/(100) )`

=
`3000(1+0.15)`

=
`3000* 1.15`

=
`3450` ($)

hence,

In her old age, most she can assume will be:

=
`6000+3450`

=
`9450` ($)