Question

Assume you want to generate $10,000 year for the next ten years and your money can earn a rate of 3% per year. If your financial advisor says she can generate that stream of equal cash flows and will cost you $100,000, which of the following correct? Multiple Choice

Your financial advisor is charging you more than what it should cost

Your financial advisor is offering the correct price for the investment

Your financial advisor is offering you the investment at a price below what it should cost

Answer 1

If we want to generate $10000/year for next 10 years, and Finacial andvisor is saying that she can genrate cash flows which costs $100000, the she is charging more than what it should cost.

When we invest 100000 in the present today and getting $10000/year for the next 10 years, the present value of all cash inflows @ 3% interest will certainly be less than $100000 and we are investing $100000 for the investment which should acctually cost less than $100000. So we are paying more than what we should do.

So 1st option is the correct answer.