Two twins just received 30K each for their 25th birthday. Both want to become mi
ID: 2663276 • Letter: T
Question
Two twins just received 30K each for their 25th birthday. Both want to become millionaires. Each plan to save 5K a year beginning a year from today. Twin A opens a mutual fund earning 6% per year in the past, Twin B invests in stock earning 20% on average per year.A. If the two funds earn teh same returns in the future as in the past, how old will each be when she becomes a millionaire?
B. How large would Twin A's contribution have to be for her to become a millionaire at the same age as Twin B, assuming their expected returns are realized?
C. Is it rational or irrational for Twin A to invest in the bond fund rather than the stock?
Explanation / Answer
Go to excel A) =FV(6%;A5;-5000;-30000;0) where you have A5 as a random number and then go to Data -> what if analysis -> goal seek. Then you set the cell to 1,000,000 by changing A5 and you will get the answer for Twin A For Twin B you use =FV(20%;A5;-5000;-30000;0) and do the same as before. in the formula 20% is the interest rate, A5 will be the years, -5000 is the annual amount, -30000 is the start amount and last, if you use 0, the first payment is after one year, and if you use 1 it is at the same time as you start saving. B) You have A5 at the time for TwinB and change -5000 to A6 and change that cell with goal seek to make your cell (A6) 1,000,000 C) By investing in the bonds Twin A is not taking as much risk as Twin B, if they would have had all their money invested like this 5 years ago, Twin A would make more money.
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