Question

Question 3 Lara Beal allocates wealth between two periods: youth and old age. Currently (in her youth) she has $8,000 in cash. She can lend and borrow at the bank at 15% (that is, lending $1 in youth will give her $1.15 in old age). Her only investment opportunity other than the bank is a project that costs $5,000 now in her youth and has a payoff of $6,000 in her old age. What is the most she can consume in her old age

Answer 1

Answer:

The correct answer is "$9450".

Explanation:

Given:

Payoff from investment,

= $6000

Lending to bank,

= $8000-5000$

= $3000$

Now,

At 15% interest,

The amount to be received from bank will be:

= $3000\times (1+\frac{15}{100} )$

= $3000(1+0.15)$

= $3000\times 1.15$

= $3450$ ($)

hence,

In her old age, most she can assume will be:

= $6000+3450$

= $9450$ ($)