Question

You are offered an investment choice where you give an organization $25,000 today in exchange for a promise of them paying your $100,000 in 30 years?   Discuss the factors that you would consider in making your decision.

Answer 1

The factors that should consider in making investment decision are

Investor: person who invests money
Investee: person who takes money from investor and pay the promised amount at the end.

1.The Rate of Return the investment is generating and rate of return the investor is expecting. if rate of return the investor is expecting is less than the rate of return the investment generates. Then it is better to not to invest.

Always the return generated by investment should by more or equal to expected return of investor.

2. The tax rate and tax to pay to government when cash was received at the end of the investment period. So here we are investing @25,000 in 0 year and receiveing $1,00,000 at the end of the 30 years. When there exists a tax rate for eg. 30% we will be receiving net of it.
like here 100000-25000= 75,000
75,000*(100-30)%=52,500.
So by investing $25000 we are going to receive 52,500 at the end of 30 years.

3. Counter party risk.: whether the investee is able to pay promised amount here $100000 without any default.

4. Purchasing power risk: Only consider real return rather than actual return the investment generates.

The inflation has to consider means
Real Return= Actual Return-Inflation rate
After considering inflation find out the real rate. Based on that only investor has to take decision whether to invest or not.