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Homework answers / question archive / Consider two investments: Invest $1,000 and receive $110 at the end of each month for the next 10 months Invest $1,200 and receive $130 at the end of each month for the next 10 months If this were your money, and you want to earn at least 12% interest on your money, which investment would you make, if any? Solve the problem by annual cash flow analysis
Consider two investments:
Invest $1,000 and receive $110 at the end of each month for the next 10 months
Invest $1,200 and receive $130 at the end of each month for the next 10 months
If this were your money, and you want to earn at least 12% interest on your money, which investment would you make, if any?
Solve the problem by annual cash flow analysis.
AW of 1 is
and AW of 2 is
Ans:
AW of 1 is $4.40
AW of 2 is $3.28
Investment 1 should be made.
Explanation:
Interest rate ( i ) = 12 % / 12 = 1 %
Number of interest period ( n ) = 10
AW of 1 = -P ( A/P , i , n ) + A
= -$1000 ( A/P , 1% , 10 ) + $110
= -$1000 ( 0.1056 ) + $110
= -$105.60 + $110
= $4.40
AW of 2 = -P ( A/P , i , n ) + A
= -$1200 ( A/P , 1% , 10 ) + $130
= -$1200 ( 0.1056 ) + $130
= -$126.72 + $130
= $3.28
Here, the annual worth of investment 1 is greater than the annual worth of investment 2 . Therefore Investment 1 should be made.
