This exercise compares the future value of investing an amount of money in diffe
ID: 2379272 • Letter: T
Question
This exercise compares the future value of investing an amount of money in different time frames. A total of $20,000 is invested into funds paying 6% interest over a 20yr period. Compute the future value at the end of 20yr for each of the following:a)$10,000 is invested in an annuity each yr for 20 yr
b) $2000 is invested in an annuity each year for 10 yrs.After the first 10 yrs, the money remains in the fund drawing 6% interest compounded annually.
c)The entire $20,000 is invested at the beginning and remains in the fund, drawing 6% interest compounded annually.
d)Comment on the best strategy to accumulate wealth over the long term.
Explanation / Answer
This exercise compares the future value of investing an amount of money in different time frames. A total of $20,000 is invested into funds paying 6% interest over a 20yr period. Compute the future value at the end of 20yr for each of the following:
a)$10,000 is invested in an annuity each yr for 20 yr
Assuming the amounts were invested at the beginning of the year, like in c:
Plug into calculator:
Number of periods = 20
Interest rate = 6%
Present value = 0
Payment = -1000
Beginning of period
Solve for Future value and get 38992.73
b) $2000 is invested in an annuity each year for 10 yrs.After the first 10 yrs, the money remains in the fund drawing 6% interest compounded annually.
Plug into calculator:
Number of periods = 10
Interest rate = 6%
Present value = 0
Payment = -2000
Beginning of period
Solve for Future value and get 27943.29
At the end of the 10th year, it is worth 27943.29
Then to find what it’s worth at the end of the 20th year:
27943.29 (1.06^10) = 50042.18
c)The entire $20,000 is invested at the beginning and remains in the fund, drawing 6% interest compounded annually.
20,000(1.06^20) = 64142.71
d)Comment on the best strategy to accumulate wealth over the long term.
You should invest early to take advantage of compounding.
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