Question

Dina is willing to invest $40,000.00 for three years, and is an economically rational Investor. She has identified three investment alternatives (L, M, and P) that vary in their method of calculating interest and in the annual interest rate offered. Since she can only make one investment during the three-year investment period, complete the following table and indicate whether Dina 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 Investment Expected future value Make this investment? Interest rate and Method 9% compound interest 89 simple interest 15% compound interest M P

Answer 1

Investment Interest rate and Method Make this Investment No L Expected Future value $51,801 $49,600 $60,835 9% compound interest 8% simple interest 15% compound interest M P No Yes Highest return Working notes and explanation: Future value = P(1+r)^n P=principal r= interest rate n=number of year Investment Investment P Future value $51,801 $40,000*(1+9%)^3 $60,835 $40,000*(1+15%)^3 8% Investment M Simple interest P+Interest per year* number of years) Future value Simple rate Investment amount $40,000 Simple interest $3,200 $40,000*8% Total interest for 3 years $9,600 $3,200*3 years Principal $40,000 Total at end of year 3 $49,600