You are considering two savings options. Both options offer a rate of return of 11 percent. The first option is to save $2,500, $1,500, and $3,000 at the end of each year for the next three years, respectively. The other option is to save one lump sum amount today. You want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select. If you select the lump sum method, how much do you need to save today

Question

Keith Blackwell

Business

9 October, 05:08

You are considering two savings options. Both options offer a rate of return of 11 percent. The first option is to save $2,500, $1,500, and $3,000 at the end of each year for the next three years, respectively. The other option is to save one lump sum amount today. You want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select. If you select the lump sum method, how much do you need to save today

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Answers (1)

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Stella Valencia · Answer 1

Lump sum = $5,663.26

Explanation:

Giving the following information:

Both options offer a rate of return of 11 percent.

The first option is to save $2,500, $1,500, and $3,000 at the end of each year for the next three years.

We need to determine the lump sum required to equal the final value of the first option.

First, we need to calculate the final value of the first option:

FV = PV * (1+i) ^n

FV = 2,500*1.11^2 + 1,500*1.11 + 3,000 = $7,745.25

We can calculate the lump sum using the same formula, but isolating PV:

PV = FV / (1+i) ^n

PV = 7,745.25/1.11^3 = $5,663.26