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Savings, Investment and Opportunity Cost: Purchasing a Corvette

Choose an asset you would like to purchase in 5 years. Calculate how much you need to save for the next five years to purchase this asset using the following website:

Base the interest rate on the five year interest rate from the Treasury department:

- Calculate the required yearly savings.
- Based on the answer from above, what does this say about your feelings of the time value of money?
- How much money could be made using the same interest rate with the amount of yearly cash flows which would have been saved for the investment if these amounts had been invested instead?
- Is this a good use of the funds? Explain your answer.
- What are the associated opportunity costs with this type of investment? Explain your answer.

Solution Preview

Here you have a situation where you want to buy a corvette 1967.This is not an investment because it will not yield any return over a certain time period. So the purchase of this expensive car is not an investment. You can say that its an expensive hobby.

Investment is a situation when you purchase an asset because you expect capital growth over a certain time period. I said "expect" because you might invest say $5,000 buying stocks and lose your money. Or you might invest $100,000 to open a store without paying attention to the location you dont have any customers and your store goes bankrupt. In both cases obviously you invested because you ...

Solution Summary

The expert examines savings, investments and opportunity costs for purchasing a corvette.