Question

An investor has $100,000 to invest in a business venture, or she can earn 10 percent/year with a $100,000 certifi cate of deposit for 4 years. Three possible business ventures have been identifi ed. Any money not invested in the business venture can be put into a bank account that earns 7 percent/year. Based on a future worth analysis, what should be done with the $100,000?

Answer 1

Answer: The investor should invest in the venture capital

Step-by-step explanation:

Option 1

The investor invests $100,000 in a business and gets a certificate of deposit for 4 years that earns 10% annually

PV = present value = $100,000

N = number of periods = 4 years

r = Interest rate = 10% annually

We need to calculate the FV (Future value of the investment), we assume the the annual interest is added back that is compounded annually.

FV = PV
`( 1 + r )^(N)`

= 100000
`( 1.10 )^(4)` = $146,410

Option 2

The investor deposits the $100,000 in the bank account that earns an annual interest rate of 7% for 4 years

FV = PV
`( 1 + r )^(N)`

= 100000
`(1.07)^(4)` = $131,080

Conclusion: The investor should select option 1 because it has a higher FV (i-e return on investment)