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.