Question

A hedge funds promise $1,000,000 payout at the end of an investment period of five years. Their investment options are as follows; a) $600,000 today and remain invested for the full term b) $200,000 every quarter for the first three quarters c) $100000 every month for the first six months If the interest rate in 12.5%, which option is the best for the hedge fund? Why?

Answer 1

Find the future value of all the options

FV (1) = -600000(1 + 12.5%)^5 + 1000000 = -81219.50

FV(2) = -200000(F/A, 12.5%/4, 3)(F/P, 12.5%/4,17) + 1000000 = -200000*3.0947*1.6873 + 1000000 = -44337

FV(3) = -100000(F/A, 12.5%/12,6)(F/P, 12.5%/4,54) + 1000000 = -100000*6.1584*1.7499 + 1000000 = -77658

The least expensive one is the second option that has a lowest future value at -44337. However, all options are giving negative returns so no one should be selected.