Question

Anthony is trying to convince me to invest in his face mask production fac- tory. He claims that a investment of $100 000 today will generate a $300 000 pay off in five and a half years' time. What annual rate of compound interest is Anthony promising me? Give your answer to two decimal places. Include a fully labelled cash flow diagram (from Anthony's perspective) in your solution. Also include your equation of value, and full working.

Answer 1

Answer:

Given:

Investment = $100,000

Maturity Value = $300,000

Time period = 5.5 years

Formula for calculating compounded future value:

Fn=P(1+i)n

Where P is principle, i is interest rate and n is time period

Assuming compounding annually,

the formula becomes:

300000=100000 (1+i)5.5

i=0.22 = 22%

Rechecking the answer with cashflow details @ 22% interest annually:

Year	Principal	Interest @ 22%
1	100000.00	22000.00
2	122000.00	26840.00
3	148840.00	32744.80
4	181584.80	39948.66
5	221533.46	48737.36
5.5	270270.82	29729.79
Total	300000.61

Hence the compounding interest rate is 22%.