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Case study -please answer all

Case 1: The Farm Purchase Jan Schmidt is 45 years old and has the option of buying a farm for \( \$ 500,000 \) or investing his money in an equity fund that has earned 14\% over the past seven years.

User JJP
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1 Answer

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Answer:

Explanation:

To determine which option is better for Jan Schmidt, we need to calculate the potential return on investment for each option.

Option 1: Farm Purchase

If Jan purchases the farm for $500,000, he will have a physical asset that he can potentially sell for a profit in the future. However, owning a farm also comes with expenses such as maintenance, taxes, and insurance. Assuming he does not sell the farm and the value remains constant, his return on investment would be 0%.

Option 2: Equity Fund Investment

If Jan decides to invest his money in an equity fund that has earned 14% over the past seven years, we can calculate his potential return on investment using the compound interest formula:

A = P(1 + r/n)^(nt)

where:

A = the future value of the investment

P = the principal amount invested

r = the annual interest rate (as a decimal)

n = the number of times interest is compounded per year

t = the number of years

Assuming Jan invests $500,000 in the equity fund and it compounds annually, his potential return on investment after 7 years would be:

A = 500,000(1 + 0.14/1)^(1*7)

A = $1,308,956.92

Therefore, investing in the equity fund would potentially yield a return on investment of approximately $808,956.92 (A - P).

Based on these calculations, it seems that investing in the equity fund would be the better option for Jan Schmidt, as it has the potential to yield a higher return on investment compared to purchasing the farm.

User Chris Riebschlager
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