Tom is an willing to invest $40,000 for three years, and is an economically rati
ID: 1170369 • Letter: T
Question
Tom is an willing to invest $40,000 for three years, and is an economically rational investor. He has identified three investment alternative (X, Y, and Z) that vay in their method of calculating interest in the annual interest rate offered. Since he can only make on investment during the six year investment period, complete the following table and indicate whether Tom should invest in each of the investment.
Investment X has the following: has 9% compound interest. What is expected Future Value? Make this investment Yes or No)?
Investment Y has the following: interest rate of 4%. What is Expected Future Value? Make this investment (Yes or No?)
Investment Z has interest rate of 6%. What is the expected future value? Make this investment (Yes or No?)
Note: I have written out the table. Instead of the table, you have it in words.
Explanation / Answer
Tom should invest in investment X as it has highest interest rate
Future value can be found using following formula
FV = PV(1+r)^n
FV = 40000(1+9%)^3
=40000(1.09)^3
=40000(1.2950)
=51801.16$
Future value of investment Y
FV = 40000(1+4%)^3
=40000(1.04)^3
=40000*1.1248
=44994.56$
Future value of investment Z
FV = 40000(1+6%)^3
=40000*1.191
=47640.64$
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