You have $1,000 and you have 2 investment options: A) You can invest all of your money in an account that pays 5%/year or B) You can invest half of your money in an account that pays 8%, but the other half will sit in your checking account earning nothing. If you plan to leave your money in these accounts for 7 years, which one is the better investment and how much money do you have after 7 years?
Amount = 1000$
Option 1 : when you invest all money in a account that pays 5% annually
Amount = 1000$
Time (N) = 7 Years
Interest rate = 5% annually
Future worth = Present value (1 + Rate of interest) ^n
= 1000 ( 1 + 5%)^7
= 1000(1 + 0.05)^7
= 1000 (1.05)^7
= 1000 * 1.41 = 1,410 $ in 7th year
Option 2 : When half of money is invested at 8 % and rest kept in checking or current account that pays no interest
Amount = 500$
Time = 7 Years
Interest rate = 8% annually
Future worth = Present value (1 + Rate of interest) ^n
=500 (1 + 8%)^7
= 500(1+0.8)^7
= 500(1.08)^7
= 500 * 1.71 = 855 $
So, total amount at the end of 7th year = 855 + 500(checking acc)
= 1355$
So, here 1st option is better than 2nd option for investment purpose
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