investment, highlow method — OpenTuition Forums

Ssuperwomen11y ago

Hi Mr, I find some question at opentuition website, but some question i cannot to solve it, so need you to help. Please see below: Question 1 : Two investment are available. Investment P offer interest of 5% per year compounded half-yearly for a period of 4 years. Investment Q offer one interest payment of 18% at the end of its 4 year life. What is the annual effective interest rate offered by each of the two investments? Question 2: Time , Output , Overhead , Cost Price index 3 year ago , 2000 , $8800 , 132, current year , 5000 , $31,000 , 164 using highlow method, what is variable cost /unit expressed in current year prices. Thanks :)

John MoffatTutor11y ago#1

1 P: Interest of 5% per year is 2.5% every half year. If the effective annual rate is R, then (1 + R ) = 1.025^2 = 1.050624 So R = 0.0506 or 5.06% Q: If annual rate is R, then (1 + R)^4 = 1.18 So R = (fourth root of 1.18) - 1 = 0.0422 or 4.22% 2 If you restate the cost three years ago in current year prices, then it becomes 8,800 x 164/132 = $10,933 It now becomes a normal high/low problem. Low is 2000 units with cost of 10933 High is 5000 units with cost of 31000

Ssuperwomen11y ago#2

Hi Sir, Thanks a lot. But i still don't understanding the question 1. why ^2 ? the question put 4 years. 1.025^2 = 1.050624 please advise.

John MoffatTutor11y ago#3

The question wants the effective rate per year. There are two x six months in a year which is why ^2. (The four years is irrelevant for this question)

Ssuperwomen11y ago#4

Oic. Thanks for your explain.

John MoffatTutor11y ago#5

You are welcome :-)

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