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An investor is considering purchasing an asset that is expected to generate a net income of $10,000 one year from now, and another $10,000 two years from now. Immediately after receiving the second payment, the investor plans to sell the asset for $200,000. If the prevailing annual interest rate is 5%, what is the maximum amount the investor should be willing to pay for this asset today?
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Dependence of Asset Prices on Interest Rates
Valuing a Business Asset
An investor is considering purchasing an asset that is expected to generate a net income of $10,000 one year from now, and another $10,000 two years from now. Immediately after receiving the second payment, the investor plans to sell the asset for $200,000. If the prevailing annual interest rate is 5%, what is the maximum amount the investor should be willing to pay for this asset today?
Comparing Investment Opportunities
Consider two investment assets, both considered equally risky. Asset A promises to pay $1,000 one year from now and another $1,000 two years from now. Asset B promises a single payment of $2,000 two years from now. Assuming a positive interest rate is used for valuation, Asset A will have a higher current valuation than Asset B.