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Math Help - Compound Interest

  1. #1
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    Compound Interest

    a woman is offered a lumpsum of $100000 to invest now or $55000 to invest at the end of the year and another $55000 to invest at the end of the following year.If all the investments are assumed to earn 7% per annum, which should she choose if she intends to withdraw money after 2years?
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  2. #2
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    Hello, Rose Wanjohi!

    Are you waiting for some magic formula?
    Do the math!


    A woman is offered (a) a lump sum of $100,000 to invest now
    or (b) $55,000 to invest at the end of the year
    and another $55,000 to invest at the end of the following year.

    If both the investments are assumed to earn 7% per annum,
    which should she choose if she intends to withdraw money after 2 years?
    Deal (a) is just compound interest.

    At the end of two years, she will have: . \$100,\!000(1.07)^2 \:=\:\$114,490



    Deal (b) is rather lame.

    During the first year, she has no money invested.
    At the end of the first year, she invests $55,000.
    That earns interest during the second year.
    . . It will be worth: . \$55,\!000(1.07) \:=\:\$58,850
    Then she invests another $55,000.

    So at the end of two years, she will have: . \$58,\!850 + 50,\!000 \:=\:\$113,850


    Obviiusly, deal (a) is better.

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