Question
Susan George has 100 to invest. She could put it in her bank account, which would pay her interest at the rate of 6% per
Susan George has 100 to invest. She could put it in her bank account, which would pay her interest at the rate of 6% per year. But Susan wants to invest the amount so as to get the maximum profit possible. She has found an investment that would give her back a total amount of 108 after one year, i.e. a profit of 8. But, since she wants to maximise the profit, she is attracted by another equally safe investment that would give her back a bigger sum of 132 at the end of five years i.e. 4 times the profit that the one-year investment would give.
Evaluate whether the one-year investment or the five-year investment would be more worthwhile for Susan, given the fact that, by making the investment, she is losing the opportunity of placing the sum in her bank account at an annual interest rate of 6%. What do your calculations tell you about the limitations of profit maximisation as an objective?
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