Question

Currently, Sally has $100,000 and her investment horizon is 8 years (i.e., all investments will be terminated at the end of year 8). She is considering one of the following investments products being offered by her private banker from OCBC Bank:

• Greentech Fund: First year return is 4% per year, and this will increase by 1% each year for the next four years. Thereafter, returns will remain constant.
• Net-zero Fund: Investment can only be made two years later (i.e., Her money is in the bank for the first 2 years). When the investment is made, the return on the first three years is 6% per year and 12% per year thereafter.
Interest of 3% per year (compounded monthly) can be earned if Sally deposits her money in an OCBC savings account. Analyze which is a better investment product. You are required to show all relevant workings.

Answer 1

To analyze which investment product is better, we calculate the future value of the investments for both the Greentech Fund and the Net-zero Fund. The Net-zero Fund has a higher future value ($137,701.44) compared to the Greentech Fund ($134,392.67). Therefore, the Net-zero Fund is the better investment option.

Step-by-step explanation:

To analyze which investment product is better, we need to calculate the future value of the investments and compare them. Let's calculate the future value of the investments for both the Greentech Fund and the Net-zero Fund.

1. Greentech Fund: Using the formula for compound interest, the future value (FV) of the investment after 8 years can be calculated as follows:

FV = $100,000 * (1 + 0.04)^1 * (1 + 0.05)^4 * (1 + 0.06)^3 = $134,392.67

1. Net-zero Fund: After 2 years, Sally can invest the money in the Net-zero Fund. The future value (FV) of the investment after 6 years can be calculated as follows:

FV = $100,000 * (1 + 0.06)^3 * (1 + 0.12)^3 = $137,701.44

Based on the calculations, the Net-zero Fund has a higher future value ($137,701.44) compared to the Greentech Fund ($134,392.67). Therefore, the Net-zero Fund is the better investment option.