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Terri Allessandro has an opportunity to make any of the following​ investments The purchase​ price, the​...

Terri Allessandro has an opportunity to make any of the following​ investments The purchase​ price, the​ lump-sum future​ value, and the year of receipt are given below for each investment. Terri can earn a rate of return of 8% on investments similar to those currently under consideration. Evaluate each investment to determine whether it is​ satisfactory, and make an investment recommendation to Terri.

Investment   Purchase Price   Future Value   Year of Receipt
A   $22,617   $32,000   4
B   $1,700   $5,000   18
C   $2,040   $7,000   14
D   $2,216   $16,000   40

Solutions

Expert Solution

In this case we need to compute the present value of future receipts and compare it with the cost of investment

Investment A

Investment

= $ 22,617

Present value of future receipt

= $ 32,000/1.084

= $ 23,520.96 Approximately

Net benefit

= $ 23,520.96 - $ 22,617

= $ 903.96

Investment B

Investment

= $ 1,700

Present value of future receipt

= $ 1,700/1.0818

= $ 1,251.25 Approximately

Net benefit

= $ 1,251.25 - $ 1,700

= - $ 448.75

Investment C

Investment

= $ 2,040

Present value of future receipt

= $ 7,000/1.0814

= $ 2,383.23 Approximately

Net benefit

= $ 2,383.23 - $ 2,040

= $ 343.23

Investment D

Investment

= $ 2,216

Present value of future receipt

= $ 16,000/1.0840

= $ 736.49 Approximately

Net benefit

= $ 736.49 - $ 2,216

= - $ 1,479.51

As can be seen Investment A and Investment C are giving a positive returns and among these also Investment A is the most profitable investment, hence Teri should invest in Investment A.

Feel free to ask in case of any query relating to this question

jeff jeffy answered 3 months ago
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