Question

Question 4 James Bennett also allocates wealth between youth and old age. He has no cash currently (in his youth), but will inherit $3000 in his old age. He can lend and borrow at the bank at 18% (that is, lending $1 in youth will give him $1.18 in old age). He has an investment opportunity that costs $12,000 now in his youth and has a payoff of $15,000 in his old age. This is the only investment opportunity available to him. What is the most he can consume in his youth

Answer 1

The most amount that should be consumed in his youth is $15,254.23.

The calculation is as follows:

Present value × 1.18 = Future value

Present value × 1.18 = ($15,000 + $3,000)

So, the present value should be

= $18,000 ÷ $1.18

= $15,254.23

The present value is the value that represents today's value.

Therefore we can conclude that the most amount that should be consumed in his youth is $15,254.23.

Learn more about the present value here: brainly.com/question/11429476