Ashley, has discovered another wine, wine D.Wine drinkers are willing to pay 30 dollars to drink it right now.The amount that wine drinkers are willing to pay will rise by 15 dollars each year that the wine ages.The interest rate is 10%.How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer.)
A)330 dollars
B)150 dollars
C)69 dollars
D)30 dollars
E)56 dollars

Question

Quizplus · Accepted Answer

The value of the wine as an investment can be calculated using the present value of future cash flows. The formula for the present value (PV) is PV = FV / (1 + r)^n, where FV is the future value, r is the interest rate, and n is the number of years. Since the wine increases in value by $15 each year indefinitely, we can consider this a perpetuity. The formula for the present value of a perpetuity is PV = PMT / r, where PMT is the payment (annual increase in value) and r is the interest rate. Here, PMT = $15 and r = 0.10, so PV = $15 / 0.10 = $150. However, this calculation only accounts for the increase in value, not the initial value. The initial value of the wine is $30, so the total value Ashley would be willing to pay is the sum of the initial value and the present value of the future increases, which is $30 + $150 = $180. Since this option is not available, the closest answer provided is $150, which seems to be a misunderstanding of the question's requirement to include the initial value. The correct approach would involve calculating the present value of all future cash flows, including the initial $30, but given the options and the misunderstanding, $150 is the closest incorrect option. The correct methodology would involve a more complex calculation considering the initial value and the perpetuity model, which is not directly reflected in the provided options.

Ashley, Has Discovered Another Wine, Wine D