Compound Interest

Rose Wanjohi · #1 $Old$ July 16th, 2009, 09:34 AM

a woman is offered a lumpsum of $100000 to invest now or $55000 to invest at the end of the year and another $55000 to invest at the end of the following year.If all the investments are assumed to earn 7% per annum, which should she choose if she intends to withdraw money after 2years?

Soroban · #2 $Old$ July 16th, 2009, 11:53 AM

Hello, Rose Wanjohi!

Are you waiting for some magic formula?
Do the math!

Quote:

A woman is offered (a) a lump sum of $100,000 to invest now
or (b) $55,000 to invest at the end of the year
and another $55,000 to invest at the end of the following year.

If both the investments are assumed to earn 7% per annum,
which should she choose if she intends to withdraw money after 2 years?

Deal (a) is just compound interest.

At the end of two years, she will have: . $\$100,\!000(1.07)^2 \:=\:\$114,490$

Deal (b) is rather lame.

During the first year, she has no money invested.
At the end of the first year, she invests $55,000.
That earns interest during the second year.
. . It will be worth: . $\$55,\!000(1.07) \:=\:\$58,850$
Then she invests another $55,000.

So at the end of two years, she will have: . $\$58,\!850 + 50,\!000 \:=\:\$113,850$

Obviiusly, deal (a) is better.