Question

5. Bud Jett (get it…like budget) has two options for an investment.

a. OPTION 1 – Invest $2,000 per month for 20 years at the beginning of each year and earn 7.5% annually.

b. OPTION 2 – Invest $2,000 per month for 20 years at the end of each year and earn 8% annually.

Calculate both options and select which investment is better for our financial cartoon friend: Bud Jett.

Answer 1

	P =	Periodic payments
	r =	rate of interest
	n =	no of years
OPTION 1	Future Value of Annuity Due =	(1 + r) * P ( (1 + r)n - 1 ) / r
		(1 + 7.5%/12) * 2000 * ((1 + 7.5%/12)^240 - 1) / (7.5%/12)
		1114383.08
OPTION 2	Future Value of Annuity =	P ( (1 + r)n - 1 ) / r
		2000* ((1 + 8%/12)^240 - 1) / (8%/12)
		1178040.831
	OPTION 2 IS BETTER SINCE IT HAS HIGHER FUTURE VALUE