Question

An investment will generate 10% annual return. You have $1000 of your own money to invest and you want to make $85 per $500 invested. How much would you need to borrow and invest (In addition to your capital) in the same investment in order to achieve your goal, if your loan costs you 4%?

a. $1000 b. $1166.667 c. $583 d. $1.166 e. None of above

Answer #1

Value of $1000 one year after | ||||

FV= PV*(1+r)^n | ||||

Where, | ||||

FV= Future Value | ||||

PV = Present Value | ||||

r = Interest rate | ||||

n= periods in number | ||||

= $1000*( 1+0.1)^1 | ||||

=1000*1.1 | ||||

= $1100 | ||||

Return on own investment =$1100-1000 =$100 | ||||

However you want | ||||

=85/500*1000 | ||||

=$170 | ||||

So that we need | ||||

=$170-100 | ||||

=$70 | ||||

Net interest income on loan investment | ||||

=10%-4% | ||||

=6% | ||||

Therefore loan to be taken would be | ||||

=$70/0.06 | ||||

=$1166.67 | ||||

Correct Option :b. $1166.667 |
||||

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