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Investment Appraisal

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Investment Appraisal

  • This topic has 3 replies, 2 voices, and was last updated 8 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • July 2, 2017 at 3:08 pm #394537
    chetan
    Member
    • Topics: 12
    • Replies: 11
    • ☆

    An investor has the choice between two investments. Investment exe offers interest of 4% per year compounded semi annually for a period of three years. Investment wye offers one interest payment of 20% at the end of its four year life.

    What is the annual effective rate offered by the two investments?

    For investment exe i got the answer.

    For wye, the available solution is as follows: (1+0.20)^0.25 – 1 = 0.0466
    = 4.66%

    how do we get the 0.25? please explain sir

    July 2, 2017 at 5:17 pm #394550
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54765
    • ☆☆☆☆☆

    If the interest is r per year, then if $100 is invested then at the end of 4 years it will have grown to 100 x (1+r)^4

    This must be equal to 100 x 1.20

    so (1+r)^4 = 1.20

    (1+r) = fourth root of 1.2 (which is the same as 1.2^0.25)

    (1+r) = 1.0466

    r = 0.0466 or 4.66%

    July 2, 2017 at 5:30 pm #394557
    chetan
    Member
    • Topics: 12
    • Replies: 11
    • ☆

    thank you very much sir 🙂

    July 3, 2017 at 8:40 am #394577
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54765
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
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