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

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.