WG Investors is looking at three different investment opportunities. Investment
ID: 2622391 • Letter: W
Question
WG Investors is looking at three different investment opportunities. Investment one is a five-year investment with a cost of $230 and a promised payout of $460 at maturity. Investment two is a seven-year investment with a cost of $230 and a promised payout of $644. Investment three is a ten-year investment with a cost of $230 and a promised payout of $1,058. WG Investors can take on only one of the three investments. Assuming that all three investment opportunities have the same level of risk, calculate the effective annual return of each investment and select the best investment choice.
Explanation / Answer
Case 1: 230*(1+r1)^5=460
(1+r1)^5=2
1+r1=1.148698
r1=14.8698%
Case 2: 230*(1+r2)^7=644
(1+r2)^7=2.8
1+r2=1.158456
r2=15.8456%
Case 3: 230*(1+r3)^10=1058
(1+r3)^10=4.6
1+r3=1.164866
r3=16.4866%
3rd investment has highest return rate and thus is best
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.