Rahul has won a prize, he has been given to options either to have Rupees 8000 today or rupees 10,000 after 2 years. The market interested is 18% and the interest is compounded on monthly basis which option should he choose?
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Rahul has won a prize, he has been given to options either to have Rupees 8000 today or rupees 10,000 after 2 years. The market interested is 18% and the interest is compounded on monthly basis which option should he choose?
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Step-by-step explanation:
To determine which option Rahul should choose, we can calculate the future value of both options and compare them.
Option 1: Rahul receives Rs. 8,000 today.
Option 2: Rahul receives Rs. 10,000 after 2 years with monthly compounding interest.
Let's calculate the future value of Option 2 using the formula for compound interest:
FV = P(1 + r/n)^(nt)
Where:
FV = Future Value
P = Principal amount (Rs. 10,000)
r = Annual interest rate (18% or 0.18)
n = Number of times interest is compounded per year (12 for monthly)
t = Number of years (2)
FV = 10,000(1 + 0.18/12)^(12*2)
FV ≈ 10,000(1 + 0.015)^(24)
FV ≈ 10,000(1.015)^24
FV ≈ 10,000 * 1.4212 (approximately)
FV ≈ Rs. 14,212.00 (rounded to the nearest rupee)
So, if Rahul chooses Option 2, he will have approximately Rs. 14,212 after 2 years. Option 2 is the better choice, as it offers a higher future value compared to Rs. 8,000 received today.