Question

Yani has $12,000 for investment purposes. His bank has offered the following three choices: Choice 1....

Yani has $12,000 for investment purposes. His bank has offered the following three choices: Choice 1. A special savings certificate that will pay $70 each month for 5 years and a lump sum payment at the end of 5 years of $13,000 Choice 2. Buy a share of a racehorse for $12,000 that will be worth $17,500 in 5 years Choice 3. Put the money in a savings account that will have an interest rate of 12% per year compounded monthly Use an annual worth analysis to make a recommendation to Yani.
What is the annual worth of each choice?

Choice 1, Certificate: $_______
Choice 2, Racehorse: $________
Choice 3, Savings Account: $________

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Homework Answers

Answer #1

Ans- Future value of money refers to the equivalent worth of the sum of money in the future based on its underlying rate of interest and time period. The future worth of money increases as the interest rates and time rises.

Choice 1:

The future worth of the savings certificate can be calculated with the following equation.

FV=Anm+PV

Where:

A=monthly annuity

n=number of years

m=periodicity

PV=par value

FV=(70×5×12)+13000

FV=4200+13000

FV=17,200

The future worth of Choice 1 is $17,200

Choice 2:

The future worth of this option in the next 5 years is $17,500

Choice 3:-

Calculate the future value of the savings account in the next five years-

FV=PV×(1+r)n

FV=12000×(1+.12)5

FV=12000×1.7623

FV=21,148.10

The future worth of Choice 3 in the next five years is $21,148.10

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