Question

 Judy has just received ​$14,444

as an inheritance from her uncle and is considering ways to use the money.​ Judy's car is one year​ old, and her monthly payment is ​$345.

She owes 48 more payments. The amount to pay off the loan is ​$14,400. Judy will save $2,160

in interest if she pays off her car loan now. Judy is also considering investing the $14,444

in a certificate of deposit​ (CD). She is guaranteed a return of 4%

on a​ four-year CD. How much would Judy earn from the​ CD? Which of the two alternatives offers the better​ return?

​(Note​: Ignore any tax​ effect.)

The amount of interest Judy would earn from the CD is ​$____________. ​(Round to the nearest​ dollar.)

Answer 1

To find the earnings from CD we can use future value formula:

FV = P(1+i)"

Where,
FV = Future Value
P = Present Value
i = rate of return
n = number of periods

FV = 14444(1+0.04)

FV = 16897.43704

To find the earnings just subtract Present value from Future Value:

i.e Earnings from CD = $16897.43704 - $14,444

=  $2,453

If she pay off the loan now then she will only save $2,160 but if she invests in CD then she will earn $2,453 as interest. So Investing the amount is better alternative.