Question

You have the opportunity to pay $2,000 to invest in a company. You estimate that this...

You have the opportunity to pay $2,000 to invest in a company. You estimate that this company will earn a total of $10,000 during its life. You expect the company to pay all of these earnings to you as a dividend 10 years from today. Currently, the risk-free rate is 6% but this investment is really risky and you feel that a 14% discount rate is appropriate. How much would you earn from this investment in today's dollars (i.e. present value)? Round to the nearest dollar.

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Answer #1

Present Value of 10,000 received 10 years later

= 10,000/(1+14%)^10

= $2,697.43

So Gain = 2,697.43-2,000

= $697.43

Note that discounted rate is used for calculating Present value so risk free rate is ignored.

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