Question

In: Finance

twelve deposits of $1,000 are made at the end of every quarter at an interest rate...

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?

Solutions

Expert Solution

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


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