Yani has $12,000 for investment purposes. His bank has offered the following thr
ID: 2721098 • 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 $105 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 $28,500 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.
Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is ±4.
Yani has $12,000 for investment purposes. His bank has offered the following three choices:
Choice 1. A special savings certificate that will pay $105 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 $28,500 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.
Explanation / Answer
Choice 1
Monthly pay = 105*12*5 = 6300
At the end of year = 13000
Total =13000+6300= 19300
Choice 2
Total worth = 28500
Choice 3
Total worth in saving account at the end of 5 years = 12000*((1+0.01)^60)=21800.36
Since future worth in choice 2 is biggest hence choice 2 is best option.
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