Question

In: Finance

Kenji is willing to invest $15,000.00 for three years, and is an economically rational investor. He...

Kenji is willing to invest $15,000.00 for three years, and is an economically rational investor. He has identified three investment alternatives (A, B, and C) that vary in their method of calculating interest and in the annual interest rate offered. Since he can only make one investment during the three-year investment period, complete the following table and indicate whether Kenji should invest in each of the investments.

Note: When calculating each investment’s future value, assume that all interest is compounded annually. The final value should be rounded to the nearest whole dollar.

Investment

Interest rate and Method

Expected future value

Make this investment?
A 8% simple interest      
B 3% compound interest      
C 5% compound interest      

Solutions

Expert Solution

Investment Interest Rate Method Expected Future Value (rounded off to whole $) Make this investment? Working Note No.
A 8% simple interest $ 18,600 YES 1
B 3% compound interest $ 16,391 NO 2
C 5% compound interest $ 17,364 NO 3

Being an economically rational investor, Kenji should Invest in Investment A as the expected future Value of Investment A is the Highest ie. $ 18,600

Working Notes:

Given in Question : All Interest rates are annual.

1. Calculation of Expected Future Value (FV) of Investment A:

We know that for calculating Future value with simple Interest,

i.e.

[where,

FV = Future Value

P= Amount of Investment

R= Rate of Interest

T= Time Period (years)]

FVA = $ 18,600

2.Calculation of Expected Future Value (FV) of Investment B:

We know that for calculating Future value with compound Interest,

[where,

FV = Future Value

P= Amount of Investment

R= Rate of Interest

n= Number of years ]

FVB = $ 16390.50 = $ 16391 (rounded off)

3.Calculation of Expected Future Value (FV) of Investment C:

We know that for calculating Future value with compound Interest,

FVC = $ 17364

jeff jeffy answered 1 year ago
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