Question

In: Economics

Yani has $12,000 for investment purposes. His bank has offered the following three choices: Choice 1....

Yani has $12,000 for investment purposes. His bank has offered the following three choices:

Choice 1. A special savings certificate that will pay $120 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 $27,000 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?

Choice 1, Certificate=
Choice 2, Racehorse=

Choice 3, Savings Account=

(Boos solution is wrong)

Expert Solution

The bank is offering an interest of 12% compounded monthly. Calculating the effective interest rate.

Effective rate of interest = 12.68% per annum.

First calculating the present worth of all the alternatives.

Choice 1.

Now converting it to Annual worth

AW1 = 550.45(A/P,12.68%,5) = $ 155.29

Choice 2. The annual worth of income can be calculated as follows

AW2 = -12,000(A/P,12.68%,5) +27,000(A/F,12.68%,5)

= - 12,000 × 0.28211 + 27,000 × 0.15529

= $ 807.45

Choice 3. The future value of the investment will be

FW3 = 12,000(F/P,12.68%,5) = 12,000 × 1.8166 = $ 21,800.36

Now convert it to annual worth

AW = -12,000(A/P,12.68%,5) +21,800.36(A/F,12.68%,5)

= $ 0

Choice 2 is best.

Last option annual worth is zero because I have used the same interest rate bank offers.

Rahul Sunny answered 2 years ago

Your grandfather has offered you a choice of one of the three following alternatives: I. $50,000...

Your grandfather has offered you a choice of one of the three following alternatives: I. $50,000 now OR II. $7,000 a year for 10 years OR III. $100,000 at the end of 10 years Assuming you could earn 6 percent annually, which alternative should you choose? If you could earn 9 percent annually, would you still choose the same alternative? (This problem could be solved using PV or FV calculations. For this problem, you are instructed to do PV calculations)

Your grandfather has offered you a choice of one of the three following alternatives: $11,000 now;...

Your grandfather has offered you a choice of one of the three following alternatives: $11,000 now; $4,500 a year for ten years; or $66,000 at the end of ten years. Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. a-1. Assuming you could earn 8 percent annually, compute the present value of each alternative: (Do not round intermediate calculations. Round your final answers to 2 decimal places.)...

3) Frank is considering the following two investment options that his broker has offered. Which one...

3) Frank is considering the following two investment options that his broker has offered. Which one should he choose and why? (show work) Option 1) Deposit $50,000 today, and for the next 10 years make a payment of $1,000 at the end of each month. After 10 years, you will be able to withdraw a total of $300,000 from your account. Option 2) Deposit $80,000 today, and for the next 10 years make a payment of $10,000 at the end...

Jim is offered an investment opportunity with the “guarantee” that his investment will be 5 times...

Jim is offered an investment opportunity with the “guarantee” that his investment will be 5 times the investment in 12 years. Assuming quarterly compounding, what is the nominal interest rate Jim is getting on this investment?

Bob has offered Alice the choice between the following two options:

Bob has offered Alice the choice between the following two options:Option A) Receive $10,000 in one year from today OptionB) Receive $500 every year starting one year from todayThe interest rate is fixed at 5%. Alice wants to choose the option with the higher present value. Calculate the present value for each option and determine which option should she choose?

Question 1.Based on the following current interest rates offered by the bank A and Bank B...

Question 1.Based on the following current interest rates offered by the bank A and Bank B , calculate the future value of an annuity of $100,000 made at the beginning of every year for 10 years using excel method. [Shows the formula] Bank A - 2.50% p.a Bank B - 2.35% p.a

Consider three choices A, B, C. Choice A gives $30 with probability 1/2 and $70 with...

Consider three choices A, B, C. Choice A gives $30 with probability 1/2 and $70 with probability 1/2. Choice B gives $50 with certainty. Choice C gives $40 with probability 1/2 and $70 with probability 1/2. (a) [2 points] For a risk averse individual, determine if the individual (i) prefers A over B, or (ii) prefers B over A, or (iii) more information on the individual's risk attitude is needed to compare A,B for the individual. (b) [4 points] Carry...

A person buying a personal computer system is offered a choice of three models of the...

A person buying a personal computer system is offered a choice of three models of the basic unit, four models of keyboard, and three models of printer. How many distinct systems can be purchased? systems

1) Bruce Wayne is going public with his new business. Berkman Investment Bank will be his...

1) Bruce Wayne is going public with his new business. Berkman Investment Bank will be his banker and is doing a best efforts sale with a 3.9% commission fee. The SEC has authorized Wayne 4,840,000 shares for this issue. He plans to keep 1,210,000 shares for himself, hold back an additional 200,000 shares according to the green-shoe provision for Berkman Investment Bank, pay off Venture Capitalists with 500,000 shares, and sell the remaining shares at $16.17 a share. Given the bids...

Consider a short multiple choice quiz with three items, and each item has four choices (only...

Consider a short multiple choice quiz with three items, and each item has four choices (only one of the choices is correct). Suppose that you are taking this quiz but you are completely and utterly unprepared for it. That means that you only option for the quiz is to guess the answers. Suppose you are thinking about the first item: what's the probability that you'll answer it incorrectly (hint: think about how many options there are, and how many of...