Answer to Question #26270 in Economics of Enterprise for japhet
answer the following question with regard to the investment theory: John intends to invest a certain sum of money today in order to earn a return of $6000 in 5 years time. how much should john invest today at the interest rate of 7%, compounded annually? would you advise john to proceed with the transaction or not? kindly motivate your position.
According to the formula of compound interest FV =PV*(1 + i)^n, where FV - future value, PV - present value, i - interest rate, n - number of years. Inour case, FV = PV + 6000, so we get: PV+ 6000 = PV*1.07^5 1.4026PV- PV = 6000 0.4026PV= 6000 PV= 6000/0.4026 = $14,904.92 We advice John to proceed with this transaction, as he will gain the significant profit. But if he has another more attractive offer, it'll be better not to proceed with this.
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