FIN 402 Week 2 Assignment Case Problem 4.1 Coates’ s Decision
FIN 402 Week 2 Assignment Case Problem 4.1 Coates’ s Decision
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Case Problem 4.1 Coates’ s Decision On January 1, 2017, Dave Coates, a 23-year-old mathematics teacher at Xavier High School, received a tax refund of $ 1,100. Because Dave didn’ t need this money for his current living expenses, he decided to make a long-term investment. After surveying a number of alternative investments costing no more than $ 1,100, Dave isolated two that seemed most suitable to his needs. Each of the investments cost $ 1,050 and was expected to provide income over a 10-year period. Investment A provided a relatively certain stream of income. Dave was a little less certain of the income provided by investment B. From his search for suitable alternatives, Dave found that the appropriate discount rate for a relatively certain investment was 4 %. Because he felt a bit uncomfortable with an investment like B, he estimated that such an investment would have to provide a return at least 4 % higher than investment A. Although Dave planned to reinvest funds returned from the investments in other vehicles providing similar returns, he wished to keep the extra $ 50($ 1,100 − $ 1,050) invested for the full 10 years in a savings account paying 3 % interest compounded annually. As he makes his investment decision, Dave has asked for your help in answering the questions that follow the expected return data for these investments. Questions