You invest $1,000 today and expect to sell your investment for $2,000 in 10 years. (LO5-1) a. Is this a good deal if the interest rate is 6%? b. What if the interest rate is 10%?

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Business

Gisselle Moon

5 March, 08:21

You invest $1,000 today and expect to sell your investment for $2,000 in 10 years. (LO5-1) a. Is this a good deal if the interest rate is 6%? b. What if the interest rate is 10%?

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Answers (1)

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Zayden Galvan · Answer 1

If the interest rate is 6%, then selling the investment for $2,000 is a good deal.

If the interest rate is 10%, then selling the investment for $2,000 is a bad deal.

Explanation:

If the interest rate is 6% then compounded yearly for 10 years 1,000 should have a future value of

1000*1.06^10=1,790

SO if the interest rate is 6% then in 10 years the investment should have a future value of 1,790 and selling it for $2,000 is a very good deal as you are making more than 6% per year which is the interest rate.

Now if the interest rate is 10% the future value will be

1,000*1.1^10=2593

Now the future value is more than 2,000 which means that we will be earning less than the interest rate, which means it is a bad deal.