Let’s say that you have $1,200.00 available each year to invest for the next 10
ID: 2658042 • Letter: L
Question
Let’s say that you have $1,200.00 available each year to invest for the next 10 consecutive years. You can invest $100.00 at the beginning of each month for the next 120 months. Alternatively, you can invest $1,200.00 at the beginning of each year for the next 10 years. Post your two ending amounts at the end of ten years. The annual interest rate is 5% compounded quarterly. Compute the future value of these two options at the end of the ten-year timeline. Explain how the time value of money affects your personal savings and investment decisions. Discuss how inflation relates to the time value of money.
Explanation / Answer
effective annual rate = (1 + 5%/4)^4 - 1 = 5.0945%
N = 10, PMT = 1,200, PV = 0, rate = 5.0945%
use FV function in Excel with type as 1
if invested annually, future value = 15,932.58
N = 40, PV = 0, rate = 5%/4, PMT = 300
use FV function in Excel with type as 1
if invested quarterly, future value = 15,639.95
Investing earlier increases the future value of the investment
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