Question

A company wishes to make $10,000,000 in 10 years. Which of the following option is the best based on future value.

A. 10% compounded quarterly

B. 9. 85% Compounded daily

C. 9.95% compounded monthly.

D. 9.80% compounded continuously.

Answer 1

- Calculating the effective Annual rate(EAR) of eachOption's Nominal rate to arrive at which is best based on future value to select:-

i). 10% compounded quarterly

Where,

r = Interest rate = 10%

m = no of times compounding in a year = 4

EAR = 1.103813 - 1

EAR = 10.3813%

ii). 9. 85% Compounded daily

Where,

r = Interest rate = 9.85%

m = no of times compounding in a year = 365

EAR = 1.1035- 1

EAR = 10.35%

iii).9.95% compounded monthly

Where,

r = Interest rate = 9.95%

m = no of times compounding in a year = 12

EAR = 1.104165- 1

EAR = 10.4165%

iv). 9.80% compounded continuously.

EAR = e^r - 1

EAR = e^(0.0980) - 1

EAR = 1.102963 - 1

EAR = 10.2963%

Conclusion- As Option (iii) 9.95% compounded monthly provide highest EAR than other options. Thus, it is best for Future Value

Option (iii) 9.95% compounded monthly

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