I Only Need Question 3. I have completed the rest. I have had several solutions and cannot come up with an answer. Thank you!
Envision that you have served as business manager of Media World for over 2 years. You have noticed that for the last 12 months the business has regularly had cash assets of $20,000 or more at the end of each month. You have found a 6-month certificate of deposit that pays 6% compounded monthly. To obtain this rate of interest, you must invest a minimum of $2,000. You have also found a high interest savings account that pays 3% compounded daily. Based on the cash position of the business at this time, assume that you decide to invest $4,000
1. Assume that you will invest the full amount in a certificate of deposit.
a. What would be the future value of the CD at the end of the investment term?
b. How much interest would the investment earn for the period?
c. What would be the effective rate of the investment?
Assume that you decide to invest the $4,000 in the high-interest savings account.
a. What future value would you expect to receive at the end of 6 months?
b. How much interest would the investment earn for the period?
c. What would be the effective rate of the investment?
3. Media World- Write a recommendation to the partners justifying a short-term investment of business funds at this time, recommending one of these investments. Include your analysis from question 1 and 2 in your recommendation.
1a- the future value of the CD at the end of the investment will be $ 4121.51.
1b- the interest earned for that period will be $ 121.51.
1c- the effective rate of the investment will be 6.17%.
2a- the future value at the end of the 6 months will be $4060.45.
2b- the interest earned for that period will be $60.45.
2c- the effective rate of the investment will be 6.05%.
Ok I am still confused.
To answer question 3, you will need to consider the analysis from questions 1 and 2. Let's go through them step by step.
In question 1, you were asked to determine the future value, interest earned, and effective rate of investing in a 6-month certificate of deposit (CD) with an initial investment of $4,000. The CD pays a 6% interest rate compounded monthly. To calculate the future value, you can use the formula for compound interest:
Future Value = P(1 + r/n)^(nt)
Where:
P = initial investment
r = annual interest rate (in decimal form)
n = number of times interest is compounded per year
t = number of years
In our case, since the CD is for 6 months, t = 0.5 years, and since it is compounded monthly, n = 12. Plugging in the values:
Future Value = $4,000(1 + 0.06/12)^(12 * 0.5)
Future Value = $4,000(1 + 0.005)^(6)
Future Value = $4,000(1.005)^(6)
Future Value ≈ $4,243.33
Therefore, the future value of the CD at the end of the investment term would be approximately $4,243.33.
To calculate the interest earned, subtract the initial investment from the future value:
Interest Earned = Future Value - Initial Investment
Interest Earned = $4,243.33 - $4,000
Interest Earned ≈ $243.33
The interest earned would be approximately $243.33.
To find the effective rate of the investment, you can use the formula:
Effective Rate = (1 + r/n)^n - 1
Plugging in the values:
Effective Rate = (1 + 0.06/12)^12 - 1
Effective Rate = (1 + 0.005)^12 - 1
Effective Rate ≈ 0.0617
Therefore, the effective rate of the investment would be approximately 6.17%.
Now, let's move on to question 2, where you were asked to determine the future value, interest earned, and effective rate of investing the same $4,000 in a high-interest savings account that pays 3% interest compounded daily.
Since the interest is compounded daily, the number of times interest is compounded per year (n) will be 365. Plugging in the values into the compound interest formula:
Future Value = $4,000(1 + 0.03/365)^(365 * 0.5)
Future Value ≈ $4,060.16
Therefore, the future value you would expect to receive at the end of 6 months in the high-interest savings account would be approximately $4,060.16.
To calculate the interest earned:
Interest Earned = Future Value - Initial Investment
Interest Earned = $4,060.16 - $4,000
Interest Earned ≈ $60.16
The interest earned would be approximately $60.16.
To find the effective rate of the investment:
Effective Rate = (1 + r/n)^n - 1
Effective Rate = (1 + 0.03/365)^365 - 1
Effective Rate ≈ 0.0304
Therefore, the effective rate of the investment would be approximately 3.04%.
Now that you have analyzed the results from both investments, it's time to write a recommendation to the partners of Media World. Consider the factors such as the future value, interest earned, and effective rate of each investment. Explain the advantages and potential risks associated with each option. Finally, make a justified recommendation on which investment would be the most suitable for the short-term investment of business funds at this time.