Mr. Bryan Dreibelbis has inherited a pile of cash , $160,000 from a long lost Un
ID: 2717688 • Letter: M
Question
Mr. Bryan Dreibelbis has inherited a pile of cash , $160,000 from a long lost Uncle who resided in Key West. Mr. D. has spent a portion of the funds on necessities- corvette, stereo, and a party with live entertain performed by KC and the Sunshine Band, the Captain & Teneal, and Barry Manilow. The money he has left he would like to invest. You are his financial advisor and he asks you the following questions:
How much would my investment be worth in 20 years if I invested in a fixed account at 5% per annum?
If I put $10,000 per year into an annuity, what will it be worth in 20 years if I can earn 10% per annum?
Someone is willing to give me $15,000 per year for twenty years if I give them my money today, should I do it?
Explanation / Answer
Worth of Investment in 20 years = 160000 * (1 + 5%)20 = $424,527.63
It can also be found out using the FV function of excel. The syntax for the same is: =FV(5%,20,0,-160000)
Worth of $10,000 per year into an annuity in 20 years if I can earn 10% per annum (assuming investment is done at the end of the period)
= 10000 * (1 + 10%)2 + 10000 * (1 + 10%)18 + 10000 * (1 + 10%)17 + _ _ _ _ + 10000 * (1 + 10%)2 +
10000 * (1 + 10%)1 + 10000 * (1 + 10%)0
This can be found out using the FV function of excel. The syntax for the same is: =FV(10%,20,-10000,0)
The value comes out to be $572,749.99
If someone is willing to give me $15,000 per year for twenty years if I give them my money today, we will have to calculate my rate of return.
160000 = 15000/(1 + r)1 + 15000/(1 + r)2 + 15000/(1 + r)3 + _ _ _ _ + 15000/(1 + r)19 + 15000/(1 + r)20
The value of r can be found out using the RATE function of excel. The syntax for the same is: =RATE(20,15000,-160000,0)
The value comes out to be 6.91%
Since the return is more than what you are getting in a fixed account (5% per annum), you should do it.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.