Question

Greg is saving to go on a trip to Australia five years from today. He has determined that she will need to have $13,000 saved to take the trip. 

a) How much will he need to invest today in order to have $13,000 in five years? Assume he can earn the following interest rates over the next five years:

First year: 3%, Second year 3.5%, Third year: 4%, Fourth year: 5% and Fifth year: 5%

b) Instead of investing the money today, he has decided to wait two years to invest the money. How much will he need to invest, two years from today, in order to have $13,000 five years from today? First year: 3%, Second year 3.5%, Third year: 4%, Fourth year: 5% and Fifth year: 5%

Answer 1

(A) if she invests now, she will have to invest $10635.68682

(b) if she invests after two years she will have to invest $11337.86848. By investing two years later, she foregoes the interest she would have earned for first two years. Now she only earns interest for year 3,4 and 5.