Question

Paolo is willing to invest $20,000.00 for three years, and is an economically rational investor. He has identified three investment alternatives (X, Y, and Z) that vary in their method of calculating interest and in the annual interest rate offered. Since he can only make one investment during the three year investment period, complete the following table and indicate whether Paolo should invest in each of the investments. Note: When calculating each investment's future value, assume that all interest is compounded annually. The final value should be rounded to the nearest whole dollar. tory Investment Interest rate and Method Expected future value Make this investment? X > 9% compound interest 12% compound interest 12% simple interest N Grade It Now Save & Continue Continue without saving

Answer 1

Investment X:

Future Value = Amount Investment * (1 + Interest Rate)^Period
Future Value = $20,000.00 * (1 + 0.09)^3
Future Value = $20,000.00 * 1.295029
Future Value = $25,900.58

Investment Y:

Future Value = Amount Investment * (1 + Interest Rate)^Period
Future Value = $20,000.00 * (1 + 0.12)^3
Future Value = $20,000.00 * 1.404928
Future Value = $28,098.56

Investment Z:

Future Value = Amount Investment + Amount Investment * Interest Rate * Period
Future Value = $20,000.00 + $20,000.00 * 12% * 3
Future Value = $20,000.00 + $7,200.00
Future Value = $27,200.00

Paolo should make Investment Y as expected future value is highest.