a) The lump-sum investment means that the young couple, Mary and John, will invest the total sum of $54,000 (18 x $3,000) at the beginning of the investment period, which yields a future value worth <u>$154,134.31</u><u> </u>at the end of the 18-year investment period,
On the other hand, the annuity investment of $3,000 implies that Mary and John will invest $3,000 annually, which yields a future value worth $98,279.98 at the end of the 18-year investment period.
b) The advantage of the lump-sum investment strategy over the annuity investment lies in the total interest generated, which is also compounded over the years.
Interest compounding means that Mary and John would be <u>earning interest on interest</u>.
The disadvantage of the lump-sum strategy, which becomes the advantage of the annuity investment, is that Mary and John may not afford the lump-sum at the beginning of the investment.
c) Since Mary and John could only afford to invest $3,000 annually, they should go ahead with the annuity investment.
The recommendation of the investment strategy is based on the financial status of Mary and John at the beginning of the investment because they are:
- Financially literate
- Moderate risk-takers.
<h3>What is future value?</h3>
The future value of an investment is the value of the cash flows in a future period. The future values of each investment strategy can be determined using the following future value formula:
FV = PV (1+r)^{n}
FV = future value
PV = present value
r = annual interest rate
{n} = number of periods interest held
Alternatively, it can be computed using an online finance calculator as follows:
Data and Calculations:
<u>Lump-sum investment:</u>
N (# of periods) = 18 years
I/Y (Interest per year) = 6%
PV (Present Value) = $54,000
PMT (Periodic Payment) = $0
<u>Results</u>:
FV = $154,134.31
Total Interest = $100,134.31
<u>Annuity Investment</u>:
N (# of periods) = 18 years
I/Y (Interest per year) = 6%
PV (Present Value) = $0
PMT (Periodic Payment) = $3,000
<u>Results:</u>
FV = $98,279.98
Sum of all periodic payments = $54,000 (18 x $3,000)
Total Interest = $44,279.98
Learn more about lump-sum and annuity investments at brainly.com/question/16522689
