In: Finance
twelve deposits of $1,000 are made at the end of every quarter at an interest rate of 10% compounded quarterly. (case A) and another deposit of $2,000 is made every six months at an interest rate of 12% for three years. case B
A.) show the cash flow diagram for both cases
b.) what is the accumulation after 3 years for each case?
C.) what is the effective interest rate for each case?
D.) which case is better?
Cash flow:
Year | 0.25 | 0.5 | 0.75 | 1 | 1.25 | 1.5 | 1.75 | 2 | 2.25 | 2.5 | 2.75 | 3 | ||
Case A | $ 1,000.00 | $ 1,000.00 | $ 1,000.00 | $ 1,000.00 | $ 1,000.00 | $ 1,000.00 | $ 1,000.00 | $ 1,000.00 | $ 1,000.00 | $ 1,000.00 | $ 1,000.00 | $ 1,000.00 | ||
Case B | $ 2,000.00 | $ 2,000.00 | $ 2,000.00 | $ 2,000.00 | $ 2,000.00 | $ 2,000.00 | ||||||||
Case A | Case b | |
0.25 | $ 1,000.00 | |
0.5 | $ 1,000.00 | $ 2,000.00 |
0.75 | $ 1,000.00 | |
1 | $ 1,000.00 | $ 2,000.00 |
1.25 | $ 1,000.00 | |
1.5 | $ 1,000.00 | $ 2,000.00 |
1.75 | $ 1,000.00 | |
2 | $ 1,000.00 | $ 2,000.00 |
2.25 | $ 1,000.00 | |
2.5 | $ 1,000.00 | $ 2,000.00 |
2.75 | $ 1,000.00 | |
3 | $ 1,000.00 | $ 2,000.00 |
FV | $ 13,795.55 | $ 13,950.64 |
PV | $ 10,257.76 | $ 9,834.65 |
1+Rate | 1.10381289 | 1.1236 |
Effective rate | 10.38% | 12.36% |
Accumulation after 3 years = Future value after 3 years:
Excel formula:
CAse A: =FV(0.025,12,-1000)
Case B: =FV(0.06,6,-2000)
c) Effective interest rate annually= (FV/PV)^1/n where n is number of years or 3 in this case
CAse A: 10.38%
CAse B:12.36%
D) Since the effective rate of case b is better one should invest in case B