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Disussion Topic: Compounding and Annuities

Mr. Ahmed has just retired from a government job and he has received a handsome amount as his gratuity. He has a plan to invest his money received from gratuity for which he is in search of a profitable investment option. One of his friends has suggested him three investment options considering his aim of investment. Mr. Ahmed is not aware of investment dynamics (the risk and return) therefore he needs help from someone to choose among the three available investment options.  Being a student of financial management you are required to help Mr. Ahmed in choosing the best option as an investment for 10 years based on the principle of “time value of money”. Following is the information available about three investment options:

Option 1: Deposit an amount of Rs. 120,000 at beginning of each year for the next 10 years in a saving account at ABC bank which provides 12% interest rate compounded annually.

Option 2: Deposit an amount of Rs. 50,000 at end of each year for the next 10 years in saving account of M Bank which provides 10% interest rate compounded quarterly.

Option 3: Deposit an amount of Rs. 100,000 at end of each year for the next 10 years in a saving account at N&P bank which provides 10% interest rate compounded semi-annually.

Required:

Using a common base of comparison, you are required to help Mr. Ahmed in estimating what will he get in future from the three investment options and which option he should select to get the maximum benefit from the investment. Calculations (formula and detailed working) are mandatory for each investment option. Decision to select the best option should be based on your calculations.

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i need mgt201 gdb please send me

MGT201 GDB Solution Idea File

MGT201_GDB_SOLUTION.pdf

# MGT201 - Financial Management Solution Spring 2021

MGT201-GDB-Solution-Spring%202021.docx

Dear Brother plz share solution today is last date of submittion

FV=PV(1+i)n

Option 1

FV=120000(1+12%)10=373200

Option 2

FV=PV(1+i/m)n*m

FV=50000(1+10%/4)10*4=134500

Option 3

FV=100000(1+10%/2)10*2=265000

option 1 must be opted

# MGT201 - Financial Management Solution Spring 2021

MGT201-GDB-Solution-Spring%202021.docx

MGT201 GDB Solution Idea File

MGT201_GDB_SOLUTION.pdf

Option 1: Deposit an amount of Rs. 120,000 at beginning of each year for the next 10 years in a saving account at ABC bank which provides 12% interest rate compounded annually.

Solution:

Cash Deposit CCF=120,000

No of years (m*n) =10

Interest rate (i/m)  =12%

Compound annually =Nill

FV=CCF

Option 2: Deposit an amount of Rs. 50,000 at end of each year for the next 10 years in saving account of M Bank which provides 10% interest rate compounded quarterly.

Solution:

Cash Deposit CCF=50,000

No of years (m*n) =10

Interest rate (i/m)  =10%

Compound Quarterly =4

Option 3: Deposit an amount of Rs. 100,000 at end of each year for the next 10 years in a saving account at N&P bank which provides 10% interest rate compounded semi-annually.

Solution:

Cash Deposit CCF=100,000

No of years (m*n) =10

Interest rate (i/m)  =10%

Compound semi-annually =2

Reason:

Option 2 is best because in option 2 profit value is high.

Option A

Cash Deposited CCF = 120,000

No of year (mxn) =10

interest Rate (i/m) = 12%

Compound annually = Nil

Formula

FV = CCF {[1+(i/m)] mxn -1} / (i/m)

FV = CFF {[1+12%]10 -1}/ (0.12)

FV = CFF {3.10584 -1}/ (0.12)

FV = CFF (17.5487)

FV = 120,000 (17.5487)

Option B

Cash Deposited CCF = 50,000

No of year (mxn) =10

interest Rate (i/m) = 10%

Compound quarterly= 4

Formula

FV = CCF {[1+(i/m)] mxn Quaretly-1} / (i/m)

FV = CCF {[+ (10%/4)]10*4 -1}/ (10%/4)

FV = CCF {[1.025]40 -1}/ (0.025)

FV = CCF {[2.685063 -1}/ (0.025)

FV = CFF {67.40252}

FV = 50,000 * 67.40252

Option C

Cash Deposited CCF = 100,000

No of year (mxn) =10

interest Rate (i/m) = 10%

Compound semi-annually= 2

Formula

FV = CCF {[1+(i/m)] mxn Quaretly-1} / (i/m)

FV = CCF {[1+(10%/2)]10*2 -1}/ (10%/2)

FV = CCF {[1.05]20 -1}/(0.05)

FV = CFF {1.65329}/ (0.05)

FV = 100,000 * 33.0658

Reason:

Option 2 is best because in option 2 profit value is high.

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