Vincent is deciding whether to buy a painting.
The current sale price of the painting is 100 dollars. The resale price of the painting after T years is 100 + T dollars, where T is a positive integer.
Ownership of the painting generates a psychological benefit of 10 dollars per year, where the benefit is received at the end of each year.
Assume that the discount rate is r = 0.10. Suppose that Vincent buys the painting. What is the earliest year after which he should sell the painting? Suppose that Vincent sells the painting as in part (a).
What is the net present value for his investment decision?
Should Vincent buy the painting? Explain briefly.
Suppose instead that Vincent cannot sell the painting after purchase.
What is the internal rate of return on the investment in the painting?