Question

2(a) Your company needs $5 million in 5 years for buying new equipment. The company has $3.5 million that can be invested with the hope that it will result in the required sum after 5 years. Two banks have made the following proposals: Bank A: 8% per year interest, compounded yearly. Bank B: 1.8% interest per quarter (i.e. quarterly compounded). Will the company receive the required funds? Which offer is better?

Answer 1

2. a ) Yes , the company will receive the required funds. The offer given by Bank A is better.

Explanation:

Bank A ;

FW = P * ( F / P , i , n )

= $3500000 * ( F / P , 8% , 5 )

= $3500000 * 1.4693

= $5142550

Bank B ;

FW = P * ( F / P , i , n )

= $3500000 * ( F / P , 1.8% , 20 )

= $3500000 * 1.4287

= $5000450

The future value of proposal given by Bank A is greater than the proposal given by Bank B.