Jane is willing to invest $50,000 for 10 years. She has identified three investm

Question

Jane is willing to invest $50,000 for 10 years. She has identified three investment alternatives that vary in their method of calculating interest and in the annual interest rate offered. Since she can only make one investment in the period, determine whether Jane should invest in each of the alternatives. (Assume interest is earned annually, round to the nearest dollar).

                                Investment                        Interest Rate and Method           Expected fv        Invest (Y or N)

                                1                                              11% compound interest                                ______

                                2                                              13% compound interest                                ______

                                3                                              13% simple interest ______   

Explanation / Answer

Value of 50000 @11% compounded = 50000 * 1.1110 =  $141,971

Value of 50000 @ 13% compounded = 50000 * 1.1310 = $194,164

Value of 50000 @ 13% simple interest = 50000 + 50000*0.13*10 = $115,000

Thus, the best option is 2. which gives 13% compound interest

Investment Interest rate and method FV Invest (Y or n) 1 50000 11% compounded $141,971 N 2 50000 13% compounded $194,164 Y 3 50000 13% simple interest $115,000 N

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