Question

As the Fund Manager for Bank of Trinidad and Tobago Limited, you are to advise the following two (2) clients based on their respective financial situations. a. Your best friend has asked to assist him in making the best investment out of the following options. Which would you advise him to choose and why, considering the risks are the same for all the options. Show all workings to support your answer.

Option 1: $12,000 in 5 years at 6 percent interest.

Option 2: $15,000 in 2 years at 9 percent interest.

Option 3: $15,000 today. No strings attached.

Option 4: $5,000 each year for 2 years at 7 percent interest compounded semiannually

Answer 1

Option 1: $12,000 in 5 years at 6 percent interest.
Excel function to calculate Present value	Present value
=PV(6%,5,0,-12000,0)	8,967.10
Option 2: $15,000 in 2 years at 9 percent interest.
Excel function to calculate Present value	Present value
=PV(9%,2,0,-15000,0)	12,625.20
Option 3: $15,000 today. No strings attached.
Option 4: $5,000 each year for 2 years at 7 percent interest compounded semi-annually
Excel function to calculate Present value	Present value
=PV(7%,2,-5000,0,0)	9,040.09

The present value is highest for option 3, Hence i will advised to choose option 3