Question

Problem 5.33 (Excel Video)

You have $12,000 in cash. You can deposit it today in a mutual fund earning 9.2 percent semiannually, or you can wait, enjoy some of it, and invest $11,000 in your brother’s business in two years. Your brother is promising you a return of at least 11.6 percent on your investment. Whichever alternative you choose, you will need to cash in at the end of 10 years. Assume your brother is trustworthy and both investments carry the same risk. (If you solve this problem with algebra round intermediate calculations to 5 decimal places, in all cases, round your input answers to the nearest penny.)

Excel Template
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What would be the future value of the mutual fund investment?

Future value of investment

$

What would be the future value of investing in your brother's business?

Future value of investment

$

Which one would yield the largest amount in 10 years?

Your brother's businessThe mutual fund

Answer 1

What would be the future value of the mutual fund investment?

Future Value = Investment * (1 + Interest)^Years

Future Value = 12000 * (1 + 0.092)^10

Future Value = 12000 * 2.41116

Future Value = $28933.92

What would be the future value of investing in your brother's business?

Future Value = Investment * (1 + Interest)^Years

Future Value = 11000 * (1 + 0.116)^8

Future Value = 11000 * 2.40610

Future Value = $26467.10

Which one would yield the largest amount in 10 years?

Mutual Fund yields higher return

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