Question

3.12. Retirement Planning Your uncle has $90,000 that he wishes to invest now in order to use the accumulation for purchasing a retirement annuity in five years. After consulting with his financial advisor, he has been offered four types of fixed-income investments, labeled as investments A, B, C, and D. Investments A and B are available at the beginning of each of the next five years (call them years 1-5). Each dollar invested in A at the beginning of a year returns $1.20 (a profit of $0.20) two years later, in time for immediate reinvestment. Each dollar invested in B at the beginning of a year returns $1.36 three years later. Investments C and D will each be available just once in the future. Each dollar invested in C at the beginning of year 2 returns $ 1.66 at the end of year 5. Each dollar invested in D at the beginning of year 5 returns $1.12 at the end of year 5. Your uncle is obligated to make a balloon payment on an existing loan in the amount of $24,000 at the end of year 3. He wants to make that payment out of the investment account. (a) Devise an investment plan for your uncle that maximizes the value of the investment account at the end of five years. How much money will be available for the annuity in five years

Answer 1

Answer:

$12106

Explanation:

Below are the possible return options, and investment options given the schedule and period of investment.

REFER TO ATTACHED FILE FOR THE CHAT

According to this chart, Uncle can get maximum return only from option C. So he should invest everything there, however he needs to pay off 24,000 loan at the end of Year 3. Therefore, he needs to invest an amount that will yield him 24000 at then end of year 3, in Plan B.

That can be calculated by 24000/1.36 = 17647

The balance amount can wait till the beginning of year 2, and then all the amount can be invested in Plan C.

The maximum return at the end of 5 years available will be:

Amount invested in Plan C = 90000 - 17647 (amount saved for the loan payment) = 72353

Return from Plan C at the end of 5yrs = 72353 x 1.66 = $ 12106