Assume an investment costs you $8,800 right now and promises to pay back $5,500 after one year and another $4,840 after the second year.What is the highest market interest rate at which this investment project is still profitable?

Question

Quizplus · Accepted Answer

To determine the highest market interest rate at which the investment is still profitable, calculate the present value of the cash flows and compare it to the initial investment. The present value of $5,500 after one year and $4,840 after two years at an 11% interest rate equals the initial investment of $8,800, making 11% the highest rate at which the investment breaks even.

Assume an Investment Costs You $8,800 Right Now and Promises