Anna has access to a perfect capital market with interest rate r = 0.15 (i.e. 15%) per period. She also has the opportunity to purchase a private asset for price P. If she purchases the asset, she will be able to invest any amount z ≥ 0 in this private asset. If Anna invests z≥0 now, the asset will return R(z) = 80.5 √√2 next period. What is the largest amount P that Anna would be willing to pay for the private asset? [Hint: What is the net present value, NPV (z), of the private investment opportunity? What is the optimal investment z* that maximizes NPV (2).]

Anna has access to a perfect capital market with interest rate r = 0.15 (i.e. 15%) per period. She also has the opportunity to purchase a private asset for price P. If she purchases the asset, she will be able to invest any amount z ≥ 0 in this private asset. If Anna invests z≥0 now, the asset will return R(z) = 80.5 √√2 next period. What is the largest amount P that Anna would be willing to pay for the private asset? [Hint: What is the net present value, NPV (z), of the private investment opportunity? What is the optimal investment z* that maximizes NPV (2).]

Personal Finance

13th Edition

ISBN:9781337669214

Author:GARMAN

Publisher:GARMAN

Chapter16: Real Estate And High-risk Investments

Section: Chapter Questions

Problem 1FPC

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