Problem: Charlie owes Joe $8000 on a note that is due in five years with accumulated interest at 6%. Joe has an investment opportunity now that he thinks will earn 18%. There's a chance, however, that it will earn as little as 4%. A bank has offered to discount the note at 14% and give Joe cash that he can invest today.
Required to do:
Q1. How much ahead will Joe be if he takes the bank's offer and the investment does turn out to yield 18%?
Q2. How much behind will he be if the investment turns out to yield only 4%?