You have your choice of two investment accounts. Investment A is a five-year annuity that features end-of-month $2,500 payments

Question

3 years ago

8

You have your choice of two investment accounts. Investment A is a five-year annuity that features end-of-month $2,500 payments

and has an interest rate of 11.5 percent compounded monthly. Investment B is a 10.5 percent continuously compounded lump sum investment, also good for five years. How much would you need to invest in B today for it to be worth as much as investment A five years from now

Business

1 answer:

oee [108] · Answer 1 · 2022-04-14T12:12:16+03:00

Answer:

$119,176.06

Explanation:

Calculation for How much would you need to invest in B today

First step is to calculate the Future value of annuity (FVA)

FVA =$2,500 * ({[1 + (.115 / 12)](5 × 12) - 1} / (.115 / 12))

FVA = $201,462.23

Since we have known the FVA Second Step will be to calculate the Present value (PV)

PV = $201,462.23 × e-1 × .105 × 5

PV= $119,176.06

Therefore the amount that you would need to invest in B today will be $119,176.06