John is considering the purchase of a lot. He can buy the lot today and expects the price to rise to $15,000 at the end of 10 years. He believes that he should earn an investment yield of 10 percent annually on this investment. The asking price for the lot is $7,000. Should he buy it?

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Explanation:

If the present value of the lot is GREATER than the asking price of $7000, then John should buy it. Lets use the formula for present value to figure out the answer. The formula is:

Where

P is the present value

F is the future value (which is 15000)

r is the yearly interest (which is 10% or 10/100 = 0.1)

t is the time in years, (which is 10 years)

Substituting, we get our

The present value is LESS THAN the current asking price, so John should not buy it.

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