Answer to Question #264806 in Microeconomics for queen

Question

Anna is thinking about making an improvement to her home. This modification will cost $10,000, but it will also increase the value of the home by $10,000 when Anna plans to sell it in 10 years. The market interest rate is 10%. 

What is the minimum amount at which Anna must personally value the improvement to be willing to go through with it? 

Answer 1

Solution:

Derive the future value:

FV = PMT $\times$ (1 + r)ⁿ

PMT = 10,000

r = 10%

n = 10 years

FV = 10,000 $\times$ (1 + 0.1)¹⁰ = 25,937

FV = $25,937

Anna must personally value the improvement at $25,937 to be willing to go through with it