Question

Future Value At age 25 you invest $1,500 that earns 8 percent each year. At age 40 you invest $1,500 that earns 11 percent per year. In which case would you have more money at age 65?

Answer 1

Answer:

CASE 1

FV =  P(1 + )n

FV = $1,500(1 + 0.08)40

FV  = $1,500(1.08)40

FV = $1,500 x 21.7245

FV = $32,587    

CASE 2

FV =  P(1 + )n

FV = $1,500(1 + 0.11)25

FV  = $1,500(1.11)25

FV = $1,500 x 13.5855

FV = $20,378

Case 1 gives more money                                                                                                                                                                                                                                                                                

Explanation:

The formula of future value of a lump sum is applied in the two cases. The present value of each investment, interest rate and number of years were provided. The number of years of the first plan is 40 years while the number of years of the second plan is 25 years. The future value of each plan equals present value, multiplied by 1 + interest rate, raised to power number of years.