Chapter 05, Supplemental Question 07 Yani has $12,000 for investment purposes. H
ID: 1094657 • Letter: C
Question
Chapter 05, Supplemental Question 07
Yani has $12,000 for investment purposes. His bank has offered the following three choices:
Choice 1. A special savings certificate that will pay $95 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 $25,000 in 5 years
Choice 3. Put the money in a savings account that will have an interest rate of 12 percent per year compounded monthly
Use an annual worth analysis to make a recommendation to Yani.
Click here to access the TVM Factor Table Calculator
Chapter 05, Supplemental Question 07
Yani has $12,000 for investment purposes. His bank has offered the following three choices:
Choice 1. A special savings certificate that will pay $95 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 $25,000 in 5 years
Choice 3. Put the money in a savings account that will have an interest rate of 12 percent per year compounded monthly
Use an annual worth analysis to make a recommendation to Yani.
Click here to access the TVM Factor Table Calculator
Choice 1, Certificate: $
Choice 2, Racehorse: $
Choice 3, Savings Account: $ Chapter 05, Supplemental Question 07 Yani has $12,000 for investment purposes. His bank has offered the following three choices: Choice 1. A special savings certificate that will pay $95 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 $25,000 in 5 years Choice 3. Put the money in a savings account that will have an interest rate of 12 percent per year compounded monthly Use an annual worth analysis to make a recommendation to Yani. Click here to access the TVM Factor Table Calculator What is the annual worth of each choice? Choice 1, Certificate: $Entry field with incorrect answer Choice 2, Racehorse: $Entry field with incorrect answer Choice 3, Savings Account: $Entry field with incorrect answer
Explanation / Answer
1. A special savings certificate that will pay $95 each month for 5 years
So total=$95*60=$5700
Profit=$13000-5700=$7300
2.Racehorse=$25000-12000
=$13000
3.12000(1.08)^5-12000=
Profit=$9148
So case 2 is best
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