Your artistically talented friend Pablo offers to sell you one of his paintings that he knows you enjoy looking at.You value this enjoyment at $100 and then expect to sell the painting at the end of one year for $500.You would buy the painting when interest rates are at 5% so long as the price he asks for is no greater than

Question

Quizplus · Accepted Answer

To determine the maximum price you would pay for the painting, you need to calculate the present value of the future selling price of $500, discounted at the interest rate of 5% for one year:

PV = FV / (1 + r)
PV = $500 / (1 + 0.05)
PV = $500 / 1.05
PV = $476.19

Next, you need to add your valuation of the enjoyment you will get from the painting:

Maximum Price = PV + Valuation
Maximum Price = $476.19 + $100
Maximum Price = $576.19

Therefore, you should only buy the painting if the price Pablo asks for is no greater than $576.

Your Artistically Talented Friend Pablo Offers to Sell You One