Sarah is thinking about purchasing an investment from HiBond Investing.If she buys the investment, Sarah will receive R100 every three months for five years.The first R100 payment will be made as soon as she purchases the investment.If Sarah's required rate of return is 16 percent, to the nearest rand, how much should she be willing to pay for this investment?

Question

Quizplus · Accepted Answer

To calculate the present value of the investment, we need to use the formula for the present value of an ordinary annuity:

PV = PMT x [(1 - (1 / (1 + r)n)) / r]

Where:
PMT = R100 (the quarterly payment)
r = 16% / 4 quarters = 0.04 (the quarterly interest rate)
n = 5 years x 4 quarters per year = 20 quarters (the number of quarters)

Plugging in these values, we get:

PV = R100 x [(1 - (1 / (1 + 0.04)20)) / 0.04] = R1,413.10

To the nearest rand, Sarah should be willing to pay R1,413 for this investment. Therefore, the best choice is B.

Sarah Is Thinking About Purchasing an Investment from HiBond Investing