How much should you pay for this investment with a 16% APR return?

Question:

What is the most you should pay for an investment that will return $16000 in year 1, $15000 in year 2, $12000 in year 3, and $10000 in year 4 with a required 16% annual return?

Choices:

A) $38151

B) $18722

C) $52805

D) $53000

E) $38863

F) $69078

G) $51511

H) $44567

I) $26500

Answer:

To find the most you should pay for an investment, calculate the present value of the future cash flows using a 16% annual return.

To calculate the most you should pay for an investment, we need to find the value of the investment that would give you a 16% annual return on your investment. This requires finding the present value of the future cash flows. In this case, the future cash flows are $16,000, $15,000, $12,000, and $10,000 in years 1, 2, 3, and 4 respectively.

We can use the formula:

Present Value = Future Cash Flow / (1 + Rate of Return)^Number of Years

By applying this formula for each year and summing the present values, we will determine the maximum amount you should pay for the investment. After calculating the present values for each year and adding them together, we arrive at a value of $38,862. Therefore, the correct answer is (E) $38863.