Question

In Class Assignment Question 3 - You are offered the following investments: - You can invest $500 today and receive $600 in 5 - You can invest the $500 in a bank account paying . What is the implied interest rate for the first choice years. The investment is considered low risk. 4%. and which investment should you choose? First Account 600 500(1+r)s r-(600 / 500)1/5-1 3.714% -+小 t 42 91

Answer 1

As the first part is already solved, the second part is:

The present value of money is given which is $500, the interest rate is 4%, we have to calculate FV of the money,

to have comparative time periods, we will also take 5 years in the second part. Thus,

FV = PV(1+r)⁵

FV = 500(1+0.04)⁵

FV = $608.33

In investment 1, we will only receive $600 after 5 years, but in investment 2, we will receive $608.33 in 5 years, hence I will choose investment 2 due to more money receivable in future.