You have $12 000 in cash. You can deposit it today in an investment fund earning 8.2 per cent semiannually, or you can wait, enjoy some of it, and invest $11 000 in your brother's business in 2 years. Your brother is promising you a return of at least 10 per cent on your investment. Whichever alternative you choose, you will need to cash in at the end of 10 years. Assume your brother is trustworthy and both investments carry the same risk. Which one will you choose?

Question

Kali

Business

6 January, 17:16

You have $12 000 in cash. You can deposit it today in an investment fund earning 8.2 per cent semiannually, or you can wait, enjoy some of it, and invest $11 000 in your brother's business in 2 years. Your brother is promising you a return of at least 10 per cent on your investment. Whichever alternative you choose, you will need to cash in at the end of 10 years. Assume your brother is trustworthy and both investments carry the same risk. Which one will you choose?

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Answers (1)

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Damaris Tanner · Answer 1

You are better off investing today in the mutual fund and earn 8.2 percent semiannually for 10 years.

Explanation:

We will need to calculate the interest generated in both of these scenarios to determine which one is the best.

In scenario 1

Periods = 10 years * 2 = 20 periods (since rate is biannual)

Principal = $12,000

Rate = 8.2%

Using the formula

Interest = Principal * Rate * Time

Interest = 12,000 * 0.082 * 20

Interest = $19,680

In scenario 2

Principal = $11,000

Rate = 10%

Period = 8 years (two years have already passed, so we calculate for 8 years since we want to see gain after 10 years)

Interest = 11,000 * 0.10 * 8

Interest = $8,800

So imvesting $12,000 at interest rate of 8.2% biannually for 10 years is a better option.