Question

Use the future worth portfolio technique (problems 6- 65, 66  ) to analyze the following situation. (Principles of Engineering Economic Analysis, 6th edition)

    An investor has 200,000 dollars to invest.  One choice is a certificate of deposit which earns 10% per year and must be held without withdrawal for 6 years. The certificate of deposit requires the full 200,000.   A passbook savings account is available (passbook means you can add and withdraw at any time) which yields 6% per year.  There are two ventures available for investment.   Any money not invested in a venture or certificate of deposit will be put into the passbook account. Any income is put into the passbook account.

Venture  A:    initial cost  120,000    net yearly income 95,000  salvage value  40,000  planning horizon 6 years.

Venture  B:    initial cost 150,000     net income is 0 until year 6 where it is a lump sum of 210,000.   There is no salvage value (it is already included in the lump sum).

What is your best opportunity?  (interest rate is not required for A and B since money put into passbook).

Answer 1

if he puts $ 200,000 in certificate of deposit

if not in certificate of deposit, investor has option of keeping money in savings account and 2 alternatives to invest. But for those options wont require initial investment of $200000

Since venture B requires an initial investment of $ 120000, the remaining $ 80000 is put in savings accountearns interest of 6% each year

Since venture B requires an initial investment of $ 150000, the remaining $ 50000 is put in savings account earns interest of 6% each year

Best opportunity is venture A because it has highest worth