Write a four paragraph answer, citing the text, to – Would you be willing to pay $500 today in exchange for $10,000 in 30 years? What would be the key considerations in answering yes or no? Would your answer depend on who is making the promise to repay? For purpose of comparison, compute the annual rate of return on this investment.
I wouldn't. At age 76, I won't live another 30 years.
What is YOUR answer?
To answer the question of whether it would be wise to pay $500 today in exchange for $10,000 in 30 years, we need to consider several key considerations. Firstly, we should take into account the time value of money, which refers to the principle that money available today is worth more than the same amount in the future. This is because money can be invested or earn interest over time. Additionally, we should consider the rate of inflation, as it erodes the purchasing power of money over time.
In terms of the promise to repay, the credibility of the individual or institution making the promise is crucial. If the entity making the promise is reputable and trustworthy, it would likely increase the likelihood of repayment. Conversely, if the entity is unknown or unreliable, there may be significant risk involved.
To compute the annual rate of return on this investment, we can use the formula for compound interest:
Future Value = Present Value × (1 + Rate of Return) ^ Number of Years
In this case, the future value is $10,000, the present value is $500, and the number of years is 30. By solving for the rate of return, we can determine the annual rate at which the investment would need to grow to reach the future value.
However, it is important to note that the answer to whether to accept this offer ultimately depends on personal circumstances, risk tolerance, and financial goals. Some individuals may consider the potential return worth the initial investment, while others may not be willing to take the risk.
To perform the actual calculation, we can use financial software or online calculators that can compute the rate of return based on the given values. This way, the precise annual rate of return can be determined, allowing for a more informed decision.