MGT201 GDB 1 Solution and Discussion

[Rabeiea Aslam]

Re: MGT201 GDB 1 Solution and Discussion

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).

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

Best of Luck!!

[zaasmi]

@Rabeiea-Aslam said in MGT201 GDB 1 Solution and Discussion:

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

[zaasmi]

@zaasmi said in MGT201 GDB 1 Solution and Discussion:

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.