WB Investors is looking for three different investment opportunities. Investment

Question

WB Investors is looking for three different investment opportunities. Investment one is a five-year investment with a cost of $480 and a promised payout of $960 at maturity. Investment two is a seven-year investment with a cost of $480 and a promised payout of $1,488. Investment three is a ten-year investment with a cost of $480 and a promised payout of $2,160. 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 for each investment and select the best investment choice.

Explanation / Answer

FORMULA = {(Ending value/begining value)^(1/no.of years)} - 1

Investment 1.

= {(960/480)^(1/5)} - 1

=14.87%

Investment 2.

= {(1488/480)^(1/7)} - 1

=17.54%

Investment 3.

= {(2160/480)^(1/10)} - 1

=16.23%

decision = choose investment 2

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