Question

1. _________________ is the manner in which people choose to hold or invest their accumulated savings, for example holding it in their homes or in financial assets such as stocks, bonds or mutual funds. (1 pts.)

2. You plan on buying a boat in the future that costs $20,000 today. If inflation is 3% per year and you can earn 8% per year in your investment account, how much money should you invest in the account today to be able to buy the boat four years from now? (Show Work)

a. $15,141.61

b. $16,545.65

c. $15,684.57

d. $16,182.38

3. An investment should be undertaken so long as it has a positive:

a. Return on Investment (ROI)

b. Net Present Value (NPV)

c. Internal Rate of Return (IRR)

d. Interest Rate after Taxes

Answer 1

1. Investment Style  is the manner in which people choose to hold or invest their accumulated savings, for example holding it in their homes or in financial assets such as stocks, bonds or mutual funds.

2. Value of the boat after 4 years = $20000*1.03^4 =$22510.18

Amount to be deposited today = present value of boat

= 22510.18/1.08^4 = $16545.65 (option b)

3. An investment should be undertaken so long as it has a positive NPV(option b)

Positive ROI or IRR do not mean the investment is worthy. If ROI or IRR is positive but less than the opportunity cost of capital, the investment is not worthy. Positive NPV is the correct measure to take decision regarding investment in a project.