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Question 8-C: Which of these situations would you prefer? (8.2) a. You inv...

. Which of these situations would you prefer? (8.2)
a. You invest $2,500 in a certificate of deposit that earns an effective interest rate of 8% per year. You plan to leave the money alone for 5 years, and the general price inflation rate is expected to average 5% per year. Income taxes are ignored.

b. You spend $2,500 on a piece of antique furniture. You believe that in 5 years the furniture can be sold for $4,000. Assume that the average general price inflation rate is 5% per year. Again, income taxes are ignored.

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Situation a: FW_{5} (A$) = $2,500 (F/P, 8%, 5) = $2,500 (1.4693) = $3,673
Situation b: FW_{5} (A$) = $4,000 (given)
Choose situation b. (Note: The general inflation rate, 5%, is a distractor not needed in the solution.)

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