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A security is currently selling for $8,000 and promises to pay $1,000 annually for the next 9 years, and $1,500 annually in the 3 years thereafter with all payments occurring at the end of each year. If your required rate of return is 7% p.a., should you buy this security and why?

Respuesta :

Answer:

Yes, because the return is greater than 7%

Explanation:

You will get NPV = 656.41. Because the NPV > 0, the cash inflows are greater than the cost (i.e., thecash outflows). So, again, this is a good investment.

chilljain33

A security providing such returns shall not be bought if the required rate of return is 7%.

What is required rate of return?

The expected percentage of returns over an investment at the time of making such investment is known as the required rate of return. In the given case, the required rate of return is 7%.

The actual returns earned over making such purchase of the security for $8000 and getting returns of $4500 is calculated around a return of 4.5%.

Hence, the security should not be bought is the rate of return required is 7% over the investments made.

Learn more about required rate of return here:

https://brainly.com/question/13987385

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