Question

CONCEPTS OF FUTURE AND PRESENT VALUE Exercise 1: You have won a lottery of $300,000. You have two options to consider: 1. Invest the money at the local bank now for five years and earn 12% interest per year. 2. Wait until next year when interest rate increase to 14% per year and invest the money for four years. Exercise 2: Suppose you invest $2,500 in a bank at the rate of 14 percent per year. What will be the four investment in six years?

Answer 1

Exercise 1
	Option 1
	FV= PV*(1+r)^n
	Where,
	FV= Future Value
	PV = Present Value
	r = Interest rate
	n= Number of years
	= $300000*( 1+0.12)^5
	=300000*1.76234
	= $528702.5
	Option 2
	FV= PV*(1+r)^n
	Where,
	FV= Future Value
	PV = Present Value
	r = Interest rate
	n= Number of years
	= $300000*( 1+0.14)^4
	=300000*1.68896
	= $506688.05
Option 1 will give a higher return on investment.