Question

Given a choice of two investments, would you choose one that pays a total return of 10 percent over 7 years or one that pays 0.2 percent per month for 7 years? What annual rate of return does each give you?

Answer 1

Answer:

It is better the first alternative.

Alternative 1 -->  10%

Alternative 2 -->  2.4265768%

Explanation:

we should convert the monthly rate to a yearly rate and compare with the other alternative:

alternative 1: 10% annual

alternative 2:  0.2 monthly

$(1+ r)^{time} = yearly\: rate$

the monthly rate capitalize 12 times per year:

$(1+ 0.002)^{12} = yearly\: rate$

$(1.002)^{12} = yearly\: rate$

1.024265768

This is a 2.4265768% annual rate.

It is better the first alternative.