You have a total of 500,000 to invest Available opportunities include: A Certifi
ID: 1209427 • Letter: Y
Question
You have a total of 500,000 to invest Available opportunities include: A Certificate of Deposit which yields 8% per year for ten years and allows no deposits or withdrawals until the end of the 10th year. A Passbook Bank account which allows deposits at any time It yields 6% per year. Machine A which has initial cost 400,000 yields a yearly revenue of 60000 per year and a Salvage Value of 40,000 at ten years. 6% is the interest rate used to analyze this choice. Machine B which has initial cost 300,000 yields a yearly revenue of 50000 per year and a Salvage Value of 30,000 at ten years. 6% is used. Use the Portfolio technique to analyze best choice using Future Worth at ten years.Explanation / Answer
Answer:
The total investment is: 500,000
a) Interest rate: 8%
Time 10 years
Future worth is:
FV10 = 500,000(1 + 0.08)10
= 500,000(2.15)
= 1,075,000
b) A Passbook Bank account which allows deposits at any time. It yields 6% per year
FV10 = 500,000(1 + 0.06)10
= 500,000(1.79)
= 895,000
c) Machine A which has initial cost 400,000 yields yearly revenue of 60,000 per year and a Salvage Value of 40000 at ten years. 6% is the interest rate used to analyze this choice.
FV10 = 400,000(A/P, 6%, 10) – 40,000(A/F, 6%, 10) + 60,000(P/A, 6%, 10)
= 400,000(0.1359) – 40,000(0.0759) + 60,000(7.3556)
= $54,360 – $3,036 + $441,336
= $492,660
d) Machine B which has initial cost 300,000 yields yearly revenue of 50,000 per year and a Salvage Value of 30,000 at ten years. 6% is used.
FV10 = 300,000(A/P, 6%, 10) – 30,000(A/F, 6%, 10) + 50,000(P/A, 6%, 10)
= 300,000(0.1359) – 30,000(0.0759) + 50,000 (7.3556)
= $40,770 – $2,277 + $367,780
= $406,273
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