Eleven years ago, Chad invested $9,000. Six years ago, Allison invested $16,400.

Question

Eleven years ago, Chad invested $9,000. Six years ago, Allison invested $16,400. Today, both Chad's and Allison's investments are each worth $2,400. Assume that both Chad and Allison continue to earn their respective rates of retum. Which one of the following statements is correct concerning these investments? Allison has earned an average annual interest rate of 3.37 percent. Chad has earned an average annual interest rate of 6.01 percent. Three years from today, Allison's investment will be worth more than Chad's One year ago, Chad's investme Allison earns a higher rate of returm than Chad. nt was worth less than Allison's investment.

Explanation / Answer

The correct answer is d) one year ago, Chad's investment was worth less than Allison's investment.

Working is provided below:

Using the excel rate function the rate of return earned:

Chad:      =rate (11,0,-9000,2400,0)= -11%

Allison     =rate (6, 0,-12000,2400,0)= -24 %

So now using the above rate of returns we calculate the Future Value for a period of 10 years for Chad, and 5 years for Allison:

Chad= FV(-11%,10,0,-9000)= $ 2706.42

Allison= FV (-24%,5,0,-12000)=$ 3138.39

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