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math/ compounded

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Scenario: A client comes to you for investment advice on his $500,000 winnings from the lottery. He has been offered the following options by three different financial institutions and requests assistance to help understand which option would be the best for his investment.

Option 1: 6% compounded interest quarterly for 5 years.
Option 2: 8% compounded interest annually for 5 years.
Option 3: 14.5% simple interest for 10 years.

  • math/ compounded -

    # 1

  • math/ compounded -

    Option 1 is worth

    = $500,000*(1+0.06/4)^(5*4)
    = $500,000*(1.015)^20
    =$673,427.50

    Option 2 is worth

    = $500,000 * (1.08)^5
    = $734,664.04

    Option 3

    = 500,000 * (1 + (.145*10))
    = $1,225,000

    Even for 5 years, you get

    = 500,000 * (1 + (.145*5))
    = $862,5000

    The best option is Option 3

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