- FV = PV Times (1 + r)^n
- FV = PV + (PV Times r Times n)
- False
- False
- True
- Laura should invest in investment P
Investment = L FV = $66,485.49 Make this investment? No
Investment = M FV = $59,400 Make this investment? No
Investment = P FV = $77,318.37 Make this investment? Yes
Explanation:
- Compound interest: FV = PV Times (1 + r)^n
- Simple interest: FV = PV + (PV Times r Times n)
- The process of earning compound interest allows a depositor or investor to earn interest on any interest earned in prior periods. False
- After the end of the second year and all other factors remaining equal, a future value based on compound interest will never exceed the future value based on simple interest. False
- All other factors being equal, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year. True
Investment = L
Interest rate and method = 5% compound interest
Expected Future Value, FV = PV (1 + r)^n
FV = 45000 (1 + 0.05)^8
FV = 45000 * (1.05)^8
FV = 45000 * 1.477455 = $66,485.49
Make this investment? Yes / No
Investment = M
Interest rate and method = 4% simple interest
Expected Future Value, FV = PV + (PV * r * n)
FV = 45000 + (45000 * 0.04 * 8)
FV = 45000 + 14400 = $59,400
Make this investment? Yes / No
Investment = P
Interest rate and method = 7% compound interest
Expected Future Value, FV = PV (1 + r)^n
FV = 45000 (1 + 0.07)^8
FV = 45000 * (1.07)^8
FV = 45000 * 1.718186 = $77,318.37
Make this investment? Yes / No
Since she can only make one investment during the eight-year investment period, Laura should invest in investment P
