Question

Your firm has a risk-free investment opportunity where it can invest $160,000 today and receive $171,000 in one year.

For what level of interest rate is this project attractive?

Answer 1

The rate of return that would the project attractive is 6.88% to two decimal places

Step-by-step explanation:

In determining,the rate of interest the project is attractive,the formula for Future Value would be used, as the project is least attractive if return is ether zero or greater than zero,hence positive rate of return

FV=PV*(1+r)^N

PV is the present value of $160,000

FV is the future value of $171000

N is the number of year which is 1

r is rate of return that is unknown

171000=160000*(1+r)^1

171000/160000=1+r

r=(171000/160000)-1

r=1.06875 -1

r=0.06875

The interest rate in dollar terms is $11,000($171000-$160000)

r=6.88%