Question

Upon starting your new job after college, you’ve been confronted with
selecting the investments for your 401(k) retirement plan. You have four
choices for investing your money:
• A money market fund that has historically returned about 0.50% per year.
• A long-term bond fund that has earned an average annual return of 4.0%.
• A conservative common-stock fund that has earned 6.0% per year.
• An aggressive common-stock fund that has earned 9.0% per year.
a. If you were to contribute $5,500 per year for the next 35 years, how
much would you accumulate in each of the above funds?
b. Now, change your worksheet so that it allows for less than annual
investments (monthly, biweekly, etc.). The annual investment will be
the same, but it will be made in smaller, more frequent, amounts.

In part b, use annual, quarterly, monthly, bimonthly (2 times a month), and weekly). To set up your spreadsheet for part c, you just need to have a cell reference for number of payments per year. Then create the 5 scenarios.
c. Set up a scenario analysis that shows your accumulated value in each
fund if you were to invest quarterly, monthly, biweekly, and weekly.
Create a scenario summary of your results.
d. What relationship do you notice between the frequency of investment
and the future value? Create a Column chart of the results that more
clearly shows the outcome from more frequently investing.

Answer 1

Amount accumulated in each fund at the end of 35 years is calculated using FV function in Excel :

rate = r / n (where r = annual rate of interest, and n = number of compounding periods per year)

nper = 35 * n (total number of periodic investments = number of years * n)

pmt = -5500/n (periodic investment = annual investment / n. This is entered with a negative sign because it is a cash outflow)

Higher the frequency of investment, higher is the future value.