Question

Linda inherited a sum of $50,000 from one of her grandparents. She would like to wisely invest the inheritance in one of the following three investment opportunities available for a period of 10 years. Help choose the best investment opportunity for Linda from the following alternatives:i) 9% compounded quarterly.ii) 8.90% compounded hourly.iii) 8.95% compounded monthly.

Answer 1

Answer:

Comparison shows that the best investment is 8.95% compounded monthly. (Part C or Number 3 option is best)

Explanation:

General Formula For Future Value:

$FV=PV(1+\frac{i}{n})^{n*k}$

Where:

FV is the future Value

PV is the present Value

i is the interest rate

n is the compound interest period

k is the Total number of years

Part A:

when i=9% . Using above formula:

n is the quarters in 1 year=4

$FV=\ 50,000(1+\frac{0.09}{4})^{4*10}\\ FV=\ 121,759.4488$

Part B:

when i=8.90% . Using above formula:

Considering year of 365 days

n is the hours in 1 year=24*365=8760 hr/year

$FV=\ 50,000(1+\frac{0.089}{8760})^{8760*10}\\ FV=\ 121,755.9321$

Part C:

when i=8.95% . Using above formula

n is the months in 1 year=12 months

$FV=\ 50,000(1+\frac{0.0895}{12})^{12*10}\\ FV=\ 121,961.0711$

The above comparison shows that the best investment is 8.95% compounded monthly. (Part C or Number 3 option is best)