You have a choice of two investments accounts. Investment A is a 10-year annuity that features...

You have a choice of two investments accounts. Investment A is a 10-year annuity that features end-of-month $1,525 payments and has an interest rate of 7% compounded monthly. Investment B is an annually compounded lump-sum investment with an interest rate of 9 percent, also good for 10 years. How much money would you need to invest in Investment B today for it to be worth as much as Investment A 10 years from now? Use Excel and provide formula

Expert Solution

To calculate the present value of the amount to be invested in investment B:-

We first need to calculate the Future value of investment B which will come from investment A
Then calculate the present value of investment B

Future value of Annuity = Annuity * [(1+r)ⁿ - 1) / r ]

where,

r = discount rate

n= number of compounding periods

Annuity = $1525

Now the interest rate is compounded monthly so r= 7%/12 = 0.00583

n= 10 years * 12 = 120

We can use this above formula in excel or also use the FV function

jeff jeffy answered 1 year ago

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