You are considering two savings options. Both options offer a rate of return of

Question

You are considering two savings options. Both options offer a rate of return of 7.6 percent. The first option is to save $2,500, $2,500, and $3,000 at the end of each year for the next three years, respectively. The other option Is to save one lump sum amount today. You want to have the same balance In your savings account at the end of the three years, regardless of the savings method you select. If you select the lump sum method, how much do you need to save today? Multiple Choice $7.414.59 $6.289.74 $6,660.00 $6,890.89 $6,784.20

Explanation / Answer

Answer is $6,890.89

First Option:

Payment in Year 1 = $2,500
Payment in Year 2 = $2,500
Payment in Year 3 = $3,000

Interest Rate = 7.60%

Present Value = $2,500/1.076 + $2,500/1.076^2 + $3,000/1.076^3
Present Value = $6,890.89

So, you need to save $6,890.89 today in lump sum method

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