Yani has $12,000 for investment purposes. His bank has offered the following thr
ID: 2722390 • 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.
What is the annual worth of each choice 1, 2, and 3?
Explanation / Answer
Solution :
To arrive at the annual worth we should arrive at the present value of future cash flow and find out the annual benefits:
choice 1 :
105*60 + 13000 = 19300 - 12000 = 7300 for 5 years = 1460
choice 2 :
28500 - 12000 = 16500 for 5 years = annual worth = 16500 / 5 = 3300
Choice 3 :
12000 *( PVFA 60 years , 1%) =
12000*1.8167 = 21800- 12000 = 9800 for 5 years hence 1 year = 1960
Thank you.
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