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Should chris invest in the picasso

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Reference no: EM131639877

Chris Stanley is considering buying an original Picasso for $400,000 today with the intention of selling it at the end of one year. Chris expects that the painting will be worth $480,000 in one year. However, his forecast is uncertain: the painting might sell for more or sell for less than this amount in one year. Currently, the bank offers an interest rate of 10%, compounded annually, on Federally insured deposit accounts up to a balance of $500,000. Joan Miro, a local banker, tells Chris that he considers the purchase of this painting to be risky; therefore, his bank would charge an interest rate of 25%, compounded annually, on a one-year loan of $400,000 to Chris for his investment in this Picasso. Chris happens to have $400,000 currently in his bank account. Should Chris invest in the Picasso? Why or why not?

Hint: this problem is implicitly a one-period NPV problem.

Reference no: EM131639877

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