Andy would like to buy a new car but must complete a two-year commitment to the Peace Corp before he will drive the new car.
The current price of the car Andy wants to buy is 22,000, and the dealer expects the price of a similar new car to be 24,000 in two years. If Andy can earn an annual interest rate of 3 on his money, should he buy the car now or wait for two years? Why? Note: Storage costs if Andy purchases the car are 0. Please limit your considerations to the factors offered in the answer choices.
A) Buy now because if Andy invests the 22,000 today it will only increase in value to 23,340, and this is less than the cost of his desired new car in two years.
B) Andy is indifferent because his 22,000 investment will be worth exactly 24,000 after two years.
C) Buy in two years because at 24,000 the car will cost less than the 24,385 Andy will have after investing the money for two years.
D) Buy in two years because 24,000 is a real deal for the car Andy wants.
Question 2
Which of the following investments has a larger future value: A 100 investment earning 10 per year for 5 years or a 100 investment earning 5 per year for 10 years?
A) An investment of 100 invested at 10 per year for 5 years because it has a future value of 161.05.
B) An investment of 100 invested at 10 per year for 5 years because it has a future value of 162.89.
C) An investment of 100 invested at 5 per year for 10 years because it has a future value of 161.05.
D) An investment of 100 invested at 5 per year for 10 years because it has a future value of 162.89.
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