Suppose you have R1 000 to invest and two of your hostel friends have offered to cut you in on their private money-making schemes. Peter promises to triple you money in 5 years. Warren says he’ll quadruple your money in 7 years. By calculating the interest rate that is compounded annually, for the 2 deals, which is the better deal?

Answer 1

To compare the two deals, we need to calculate the interest rate that is compounded annually for each offer.

For Peter's offer to triple your money in 5 years, we need to solve for the interest rate in the compound interest formula:

Future Value = Present Value * (1 + Interest Rate)^Number of Years

3000 = 1000 * (1 + Interest Rate)^5
3 = (1 + Interest Rate)^5
1.44 = 1 + Interest Rate
Interest Rate = 0.44 or 44%

For Warren's offer to quadruple your money in 7 years, we again need to solve for the interest rate:

4000 = 1000 * (1 + Interest Rate)^7
4 = (1 + Interest Rate)^7
1.52 = 1 + Interest Rate
Interest Rate = 0.52 or 52%

Comparing the two interest rates, Warren's offer of quadrupling your money in 7 years at an interest rate of 52% compounded annually is the better deal compared to Peter's offer of tripling your money in 5 years at an interest rate of 44%.