Answer:
(a) 208.92years
(b) 188.67years
(c) $6000 ($650 larger than her initial annual contribution)
(d) It is irrational for Allison to invest in the bond fund
Explanation:
Allison and Leslie start annual contribution of $5,000 beginning a year from today (22nd birthday)
(a) Allison starts her investment at 22 in Safety First Bond Fund with returns of 7% per year
Annual total investment = 5000 + (5000 × 0.07) = 5000 + 350 = $5,350
Allison's age when she becomes a millionaire = 22 + (1,000,000/5,350) = (117,700 + 1,000,000)/5,350 = 1,117,700/5,350 = 208.92years
(b) Leslie starts her investment at 22 in New Issue Bio-Tech Fund with returns of 20% per year
Annual total investment = 5000 + (5000 × 0.2) = 5000 + 1000 = $6,000
Leslie's age when she becomes a millionaire = 22 + (1,000,000/6,000) = (132,000 + 1,000,000)/6,000 = 1,132,000/6,000 = 188.67years
(c) Allison's age when she becomes a millionaire is 208.92years
Her annual contributions to become a millionaire at the same age as Leslie = 1,000,000/(188.67 - 22) = 1,000,000/166.67 = $6,000
(d) It is irrational for Allison to invest in the bond fund rather than in stock because it will take longer time to achieve her aspiration to become a millionaire
