Answer:
Lump sum= $5,663.26
Explanation:
Giving the following information:
Both options offer a rate of return of 11 percent.
The first option is to save $2,500, $1,500, and $3,000 at the end of each year for the next three years.
We need to determine the lump sum required to equal the final value of the first option.
First, we need to calculate the final value of the first option:
FV= PV*(1+i)^n
FV= 2,500*1.11^2 + 1,500*1.11 + 3,000= $7,745.25
We can calculate the lump sum using the same formula, but isolating PV:
PV= FV/(1+i)^n
PV= 7,745.25/1.11^3= $5,663.26
