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Aworker deposits $650 at the end of each month for 7 years in an investment account with a guaranteed interest rate of 4 65% compounded monthly
Aworker deposits $650 at the end of each month for 7 years in an investment account with a guaranteed interest rate of 4 65% compounded monthly. (a) Find the value in the account at the end of the 7 years (b) A twat financial planner offers the worker an investment strategy of depositing $550 a month for 7 years with a guaranteed interest rate of 6 75% compounded monthly What is the value of this investment strategy at the end of 7 years? (c) How much more money is gained by investing in the better strategy described in part (a) or in part (b)?
(a) The worker's deposits form an
should be used
because the deposits are made at the
The value in the account at the end of the 7 years will be $ . (Do not round until the final answer. Then round to the nearest cent as needed )
(b) The value of the rival firm's investment strategy at the end of 7 years will be $ (Do not round until the final answer Then round to the nearest cent as needed ) (c) The worker will gain $0 more by investing in the better strategy. (Do not round until the final answer Then round to the nearest cent as needed )
of each period Therefore, the formula
Expert Solution
a) Computation of Future Value using FV Function in Excel:
=-fv(rate,nper,pmt,pv)
Here,
FV = Future Value = ?
Rate = 4.65%/12 = 0.3875% compounded monthly
Nper = 7 years * 12 months = 84 months
PMT = $650
PV = 0
Substituting the values in formula:
=-fv(0.3875%,84,650,0)
FV or Future Value = $64,388.09
b) Computation of Future Value using FV Function in Excel:
=-fv(rate,nper,pmt,pv)
Here,
FV = Future Value = ?
Rate = 6.75%/12 = 0.5625% compounded monthly
Nper = 7 years * 12 months = 84 months
PMT = $550
PV = 0
Substituting the values in formula:
=-fv(0.5625%,84,550,0)
FV or Future Value = $58,850.19
c)
Money gained from Option 1 = $64,388.09 - ($650*84)
= $64,388.09 - $54,600
= $9,788.09
Money gained from Option 2 = $58,850.19 - ($550*84)
= $58,850.19 - $46,200
= $12,650.19
So, Best strategy is Option 2 provided by the rival because money gained from that account is $12,650.19 which higher than option 1 in part a.
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