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