Question

you have 1000$. instead of buying a new iphone that costs $1000, you would like to buy shares of apple. if required rate of returns on Apple shares is 5%per year. what would be the worth of $1000 that you have invested in Apple shares 5 years ago?

a-$1000

b- neither a nor b is correct

c- more than $1000 since i have to compound i by 5% per year

d- less than $1000 since i have to discount it by 5% per year

e-i cannot tell since i do not know what iphone price would be in 5 years

Answer 1

Option c is correct

Our $1,000 invested 5 years ago would be worth more than $1000 since we have to compound by 5% per year.

The required return is 5%. $1,000 invested 5 years ago would be worth $1,276.2815625 today. Calculations below...

FV = PV * (1 + r)^n

FV = 1,000 * (1 + 0.05)^5

FV = $1,276.2815625

Option a is incorrect because since the required rate is positive it would compound.

Option d is incorrect because we would compound not discount

Option e is incorrect because we do not need to know the price of iPhone. Because we know the amount we invested.