Multiple choice

Mungeri Lal has two investment plans- A and B, to choose from. Plan A offers interest of 10% compounded annually while plan B offers simple interest of 12% per annum. Till how many years is plan B a better investment?

  1. 3

  2. 4

  3. 5

  4. 6

  5. 7
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Let P be the principal. Plan A amount = P * (1.1)^n. Plan B amount = P * (1 + 0.12n). We want P * (1.1)^n < P * (1 + 0.12n). For n=3: 1.331 < 1.36 (True). For n=4: 1.4641 < 1.48 (True). For n=5: 1.61051 > 1.60 (False). Thus, it is better for 4 years.

AI explanation

We compare the multipliers for plan A compounded annually at 10 percent and plan B earning simple interest at 12 percent over time. Plan A yields a total return of (1.10)^t, while plan B yields a total return of 1 plus 0.12t. For 4 years, plan B yields 1.48 which is greater than plan A's yield of 1.4641, but at 5 years plan A yields 1.6105 which overtakes plan B's yield of 1.60. Therefore, plan B remains the better investment for 4 years. The answer is 4.

Keep practicing — related questions