Total Marks 5

Starting Date Wednesday, June 03, 2020

Closing Date Tuesday, June 09, 2020

Status Open

Question Title GDB #01

Question Description

Discussion Topic: Time Value of Money

Discussion Question:

Mr. Ahmed has just received gratuity and he is looking for a suitable investment option that will repay him in long term. He has consulted his friend to invest Rs. 100,000 out of his gratuity amount. His friend has suggested following two options:

Option 1:

Investing Rs. 100,000 at 12% interest rate compounded semiannually for 10 years.

Option 2:

Depositing half of investment amount in a saving account for 10 years that pays 10 % interest rate compounded annually and investing remaining half amount at 12% interest rate compounded annually for 10 years.

Required:

```
Calculate the value of both investment options
Based on the calculation of part 1, which option Mr.Ahmed should select and why?
```

Note: Complete Calculations and formulas are mandatory; marks will be deducted on providing just answers).

Important Instructions:

```
Post your GDB comments (answer) against GDB # 01 rather than against lessonsâ€™ MDB.
Your discussion must be based on logical facts.
Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
Books, websites and other reading material may be consulted before posting your comments; but copying or reproducing the text from books, websites and other reading materials is strictly prohibited. Such comments will be marked as Zero (0) even if you provide references.
Obnoxious or ignoble answer should be strictly avoided.
Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB.
```

For Detailed Instructions, please read the GDB # 01 announcement.

Best of Luck!!

]]>Option 1:

Investing Rs. 100,000 at 12% interest rate compounded semiannually for 10 years

Option 2:

Depositing half of investment amount in a saving account for 10 years that pays 10 % interest rate compounded annually and investing remaining half amount at 12% interest rate compounded annually for 10 years.

Calculation of both Option

Option 1:

Semi Annual Yearly Compounding

FV = PV x (1 + i/2) 2n

FV = 100,000 x (1 + 0.12/2) 2 x 10

FV = 320713.5

Option 2:

FV= PV (1 + i) n

FV = 50,000 (1+0.12) 10

FV = 155292.4

Option 1 is best for Mr. Ahmad because the value of FV is grater than Option 2

Calculate the value of both investment options

Being able to determine the present value of each potential investment, purchase, or cash flow before committing to it can help you and your company make the best possible decisions.

Calculation Formula

PV = FV / (1 + rt)

Take a closer look at earnings

PV = Present value.

FV = Future value.

r = Rate.

t = Time (in years)

1 = Percentage constant.