you invest in the esmeralda corporation by loaning them a certain amount of mone

Question

you invest in the esmeralda corporation by loaning them a certain amount of money, L. They agree to pay you interest each year of $100, payable continuously. Esmeralda Corporation must extinguish the debt by making a single payment of $1000 at the end of either the 8th, 9th, or 10th year. Interest payments stop once the $1000 is paid. You desire at least a 12% rate of return on your investment. Determine the largest amount L can be.

A- less than $915

B- $915-925

C- $925-935

D- $935-945

E- $945 and up

Explanation / Answer

Maximum value of L = $100 * [1 - (1+12%)-8] / 12% + $1000 / (1+12%)8

= $900

Minimum value of L = $100 * [1 - (1+12%)-10] / 12% + $1000 / (1+12%)10

= $887

So, A - less than $915

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