In: Accounting
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.