You are considering buying a share of stock in the tech company Neutrino, LLC for $250. You expect the stock to pay a dividend of $2 after 3 years and $10 after 4 years, but no dividends in years 1 and 2. You also expect to sell the stock after 4 years for $270.
(a) If your bank account pays an interest rate of 3 percent, is Neutrino, LLC a good invest- ment? What about if your bank pays an interest rate of 4 percent?
(b) If your bank account pays an interest rate of 4 percent, what would the future sale price of stock in Neutrino, LLC have to be after 4 years for the current stock price of $250 to be fair value?

(a)-$14.86, If NPV is negative, it is not considered a good investment. (b) $287.38

Explanation:

Solution

Recall that,

(a) The sale price expected=$270

The price of purchase=$250

The dividend after year 3=$2

The dividend after year 4=$3

The NPV of investment= -250+2/(1+i)^3+(3+270)/(1+i)^4

Then,

If the interest is =3%

The NPV of investment=-250+2/(1+3%)^3+(3+270)/(1+3%)^4=-$5.61

When the NPV is negative, this is not considered  a good investment.

Thus,

If  the interest is =4%

The NPV of investment=-250+2/(1+4%)^3+(3+270)/(1+4%)^4=-$14.86

If NPV is negative, it is not considered  a good investment.

(b) Let  say the sale price be X

Then,

The NPV of investment=-250+2/(1+4%)^3+(3+X)/(1+4%)^4

If $250 is a fair price,  the NPV is taken as zero

so,

=-250+2/(1+4%)^3+(3+X)/(1+4%)^4=0

= -250+1.777993+(3+X)*0.854804=0

=(3+X)*0.854804=248.222007

=3+X=290.38

Therefore.

X=$287.38

d, conspicuous consumption is when you try to increase your wealth or social status (and in the case he's trying to create the perception of wealth considering he can't really afford it)