Question

You have started an investment club with your friend. You identified an account which you think will pay 8% per year. You are going to invest $1200 per year. Your friend is going to invest $100 per month. You plan to invest for 4 years. All else equal, which of the following is true.

A. Your friend’s investment will have the higher future value.

B. Both investments will have the same future value

C. Your investment will have the higher future value.

Answer 1

We can find the future value of both investment options and compare to answer the question. Use future value of annuity formula:

Where,
FVA = Future Value of Annuity
A = Annuity or monthly payment
i = rate of interest
n = number of years
a = number of payments in a year

First option: Investing $1200 per year

Substituting the values, we get:

..............................................(your investment)

Second option your friend's investment:

............................(your friend's investment)

From both the options we can see that your friend's investment is higher.

Therefore, Option A is the correct answer: Your friend’s investment will have the higher future value.