Yani has $12,000 for investment purposes. His bank has offered the following thr
ID: 2638518 • Letter: Y
Question
Yani has $12,000 for investment purposes. His bank has offered the following three choices:
Choice 1. A special savings certificate that will pay $90 each month for 5 years and a lump sum payment at the end of 5 years of $13,000
Choice 2. Buy a share of a racehorse for $12,000 that will be worth $26,500 in 5 years
Choice 3. Put the money in a savings account that will have an interest rate of 12% per year compounded monthly
Use an annual worth analysis to make a recommendation to Yani.
What is the annual worth of each choice?
Explanation / Answer
Answer:
Choice 1 will earn him an amount of $5400 at the end of 5 years with monthly payments and lump sump amount of $13000 that is a total of $18400.
Choice 2 will earn him an amount of $ 26500 in 5 years.
Choice 3 will earn him using the formula for compounding interest monthly...at the end of 5 years one will earn $1,011,636.76
Here = effective rate of interest =12.68 calculation period = 5 years, base amount = $12,000, formula = p(1+r/n)^nt.
Hence Yani must opt for choice 3 .
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