Question
In: Finance
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 17 hours agoRelated Solutions
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