ADB offers to pay you a lump of 20,000 GHS after 5 years if you deposit 9,500 GHS with them

today.
UT Bank on the other hand says that they will pay you a lump sum of 22,000 GHS after 5 years if you
deposit 10,700 GHS with them today. Which offer should you accept and why?
Solution.
ADB
FV = 20,000 PV = 9,500 n=5
𝐹𝑉 = 𝑃𝑉(1 + 𝑟)𝑛

𝑛 𝐹𝑉
𝑟= √ −1
𝑃𝑉

5 20,000
𝑟=√ −1
9,500

= 0.1605%

UMB
FV = 22,000 PV = 10,700 n=5

𝐹𝑉 = 𝑃𝑉(1 + 𝑟)𝑛

𝑛 𝐹𝑉
𝑟= √ −1
𝑃𝑉

5 22,000
𝑟=√ −1
10,700

= 0.1551%
The client should go with the ADB offer. This is because the ADB offer has higher rates than that of the
UMB offer. Higher rates mean higher risks. Higher risks brings about higher returns too.