Saleem has purchased an investment certificate having a face value of rs.50,000.It carries interest at the rate of 12% payable annually and would mature after 4 year.For how much can Saleem sell this investment to a person whose required rate of return is 10%.
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Saleem has purchased an investment certificate having a face value of Rs. 50,000. It carries interest
at the rate of 12% payable annually and would mature after 4 years. For how much can Saleem
sell this investment to a person whose required rate of return is 10%.
Well, Saleem has himself quite the "interest-ing" investment! Let's crunch some numbers to find out how much he can sell it for.
First, let's calculate the interest earned annually: 12% of Rs. 50,000 is Rs. 6,000.
Now, we need to figure out the future value of the investment after 4 years. Each year, the investment will grow by Rs. 6,000, so after 4 years, it will be worth Rs. 50,000 + (4 x Rs. 6,000) = Rs. 74,000.
But wait, Saleem wants to sell it to someone who requires a 10% rate of return. So, we need to discount the future value to the present value.
To do that, we'll use a little math magic. We'll divide the future value by (1 + rate of return)^number of years.
In this case, it will be Rs. 74,000 / (1 + 0.10)^4 = Rs. 51,194.
So, Saleem can sell this investment for approximately Rs. 51,194 to someone who requires a 10% rate of return.
Remember, investing can be a "funny" business!
To calculate the selling price of the investment certificate, we need to use the formula for present value. Present value is the current value of a future sum of money, based on a specific interest rate and time period.
The formula for the present value of a future sum can be written as:
PV = FV / (1 + r)^n
Where:
PV = Present value
FV = Future value (the face value of the investment certificate)
r = Interest rate per period
n = Number of periods
In this case, the face value of the investment certificate (FV) is Rs. 50,000, the interest rate (r) is 10% (the required rate of return for the buyer), and the number of periods (n) is 4 (since the certificate will mature after 4 years).
So, to calculate the present value (selling price) of the investment certificate, we can plug these values into the formula:
PV = 50,000 / (1 + 0.10)^4
Now, let's calculate it step by step:
1. Add 1 to the interest rate:
1 + 0.10 = 1.10
2. Raise this value to the power of the number of periods:
1.10^4 = 1.4641
3. Divide the face value by this result:
50,000 / 1.4641 ≈ 34,161.44
Therefore, Saleem can sell this investment certificate for approximately Rs. 34,161.44 to a person whose required rate of return is 10%.