Investment A has a future value of 4000 Investment B has a f

Investment A has a future value of $4,000. Investment B has a future value of $3,000. All else equal, which of the following is true? A. Investment A has the higher interest rate. B. Invertment A has lower present value. C. Investment B has the higher interest value. D. Investment B has the higher present value.

Solution

Future value from an investment (present value) is computed as -

FV = PV x (1 + r)ⁿ

where, r is the interest rate and n being the no. of years

Investment A in our case has a higher future value. It is possible only when -

i) Investment A has a higher present value; or

ii) Investment A has a higher interest rate; or

iii) Investment A is invested for more no. of years.

Therefore, among the given options, Option A is correct, i.e., Investment A has the higher interest rate.