Question

A. Judy Dench took up the government offer on the “Special Early Retirement Programme” and received a lump sum payment of J$3.5M. After clearing her mortgage and credit card debts she has J$1.5M remaining. She saw an advertisement recently in the local newspaper where JMMB was offering three investments offer to the public as follow:
Investment Product
Interest Rate
Term
Conditions
Investment A
16%
5 years
Interest is compounded annually. Principal & Interest is paid at the end of the 5 years.
Investment B
13.80%
6 years
Interest is compounded annually. Principal & Interest is paid at the end of the 6 years.
Investment C
11.60%
7 years
Interest is compounded annually. Principal & Interest is paid at the end of the 7 years.
If Judy wants to invest only J$1,000,000; which one of the investment products based on calculations would you recommend her to invest in?
B. John Travolta plans on investing the following cash flows at the beginning of each year:
Year Cash Flow
2019 $30 000
2020 $40 000
2021 $60 000
2022 $90 000
2023 $20 000
How much would John accumulate at the end of 2023 if the interest rate is compounded annually at an interest rate of 9.8%?

Answer 1

a) To calculate the return on investment over the end of their respective tenures, we use the following formula

Product	A	B	C
Interest rate	16%	13.80%	11.60%
Duration (Years)	5	6	7
Return	21,00,342	21,71,969	21,56,003

As the return is highest for Product B ($ 21,71,969 Mn), Judy should invest in this product.

b) To calculate the return on investment over the end of their respective tenures, we use the following formula

	2019	2020	2021	2022	2023
Cash Flow	30,000	40,000	60,000	90,000	20,000
Invested years	5	4	3	2	1
Value in 2023	47,878	58,139	79,425	1,08,504	21,960
Total value	3,15,906

John will get $ 3,15,906 at the end of 2023