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Brick co had put aside $400,000 for the purchase of new machinery as part of the project. A recent review has concluded that their existing machinery will last four more years before it will need to be replaced. The company have therefore decided to invest the $400,000 for the next four years.
Bank A is offering a compound rate interest of 4% per annum for the next four years and Bank B is offering a simple
rate of 5% per annum for the first two years, increasing to 5.5% for the following two years.
Assume the investment is made on the first day of year 1 and no withdrawals are made in the period. How much will Brick co have at the end of year 4 if they invest with Bank A or Bank B?
For bank A i got my answer as 400000x(1+0.04)^4=467943
And bank b 488400 by using the simple interest formula, did i calculate the right way?
Your answer for bank A is correct.
For bank B, the interest in each of the first 2 years is 5% x 400,000 = 20,000 per year.
The interest in each of the second 2 years is 5.5% x 400,000 = 22,000 per year.
Therefore the total interest is (2 x 20,000) + (2 x 22,000) = 84,000.
Therefore the deposit will have grown to 484,000.
Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA Approved Publishers. They have answers and explanations.