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In: Accounting

Question 1 (15 marks) Karen and Maggie plan to buy investment plans launched by ABC Insurance...

Question 1
Karen and Maggie plan to buy investment plans launched by ABC Insurance Company for purchasing flat after five years. Karen is interested in “25% Bonus Plan”, a 5 year saving insurance policy, which insurance company provides guaranteed bonus amounting 25% of contributions made by policyholder during the policy period and the bonus will be paid at the end of policy period. Meanwhile, Maggie would like to make lump sum investment of $400,000 today in “Future Tech Star Fund”, the US technology stock fund that focusing on identifying companies with high potential earnings growth such as Tesla, Apple, Nvidia and Microsoft. She has no intention to withdraw any cash during the investment period.
The expected contributions made by Karen at the end of each year and expected annual returns of “Future Tech Star Fund” in coming five years are shown as below:

Expected contributions
made by Karen
Expected annual returns of
Future Tech Star Fund
Year 1 $50,000 26.8%
Year 2 $60,000 13.4%
Year 3 $100,000 -10.3%
Year 4 $75,000 5.3%
Year 5 ---- 8.9%

a) State formula to calculate annual return earned by Karen.

b) Identify and explain with calculations whether “25% Bonus Plan” or “Future Tech Star Fund” earns higher annual return in this case. You can use Excel to help you calculate return of “25% Bonus Plan” if necessary.

c) Maggie is considering invest “QQQ”, an ETF listed in the US tracking the performance of NASDAQ 100 Index (including large cap technology stocks listed in the US). Explain the trade offs between investing in “QQQ” and “Future Tech Star Fund”.

d) Peter is considering invest “Future Tech Star Fund” with the same initial investment amount. On the other hand, he plans to contribute more at the beginning of Year 3 and reduce the investment amount at the beginning of Year 5. Explain whether he can earn better return compared with Maggie. No calculations are allowed.

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