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. Respond to at least two of your fellow students’ postings.
How would you like us to help you with this assignment?
Your opinion of what would be the best route to take.
I haven't computed the annual rate of return -- so don't have an opinion.
At my age, though, I won't live 30 years.
What do you think?
Well I guess I'll have to figure this out myself.
To determine whether it is worth paying $500 today in exchange for $10,000 in 30 years, we need to consider various factors. Firstly, we can calculate the annual rate of return on this investment by using the present value formula. The present value (PV) is the amount we are paying today, which is $500, and the future value (FV) is $10,000. The number of years (n) is 30, and the rate of return (r) is what we need to find. Rearranging the formula, we have: PV = FV/(1+r)^n. By plugging in the values, we can solve for r to find the annual rate of return.
Additionally, we should consider the key considerations for answering yes or no. Factors such as the opportunity cost of the $500, inflation rate, and the reliability of the promise to repay should be taken into account. If the opportunity cost is high, meaning we can earn a higher return on investment elsewhere, it may not be worth paying $500 today. Inflation also erodes the value of money over time, so we should consider the rate of inflation and how it would impact the $10,000 in 30 years. Lastly, the credibility and ability of the person making the promise to repay should be considered. If there are doubts about their reliability, it may not be wise to proceed with the deal.
The answer to the question of whether we would be willing to pay $500 today depends largely on these considerations. If the calculated annual rate of return is higher than the opportunity cost, and considering a reasonable rate of inflation, it can be a favorable investment. However, the credibility of the person making the promise to repay is also crucial. If there are doubts about their reliability or the terms of repayment, it may not be a wise decision.
Since this question asks for a rate of return, it is important to understand the present value formula and how to calculate the annual rate of return. By utilizing this formula, considering various factors, and evaluating the credibility of the promise to repay, we can make an informed decision on whether this investment is worthwhile.