Posted by Diane on Tuesday, December 21, 2010 at 8:31am.
Are you supposed to compare the relative merits of these options? The value of an annuity depends upon the actuarial probability of different expected life spans (expected number of payouts), and upon when the payouts begin. At death, the value of an annuity is zero.
Expected life span depends upon the age, sex, smoking history, obesity and general health (pre-existing conditions) of the individual.
Anyway, you have not asked a question yet and we do not have access to your text.
Yes. I just don't know how to do them. I have tried and would just like some help please. Thanks
Now, I have the formula's I am to use and just can't figure out if it is correct.
Quarterly = P (1 + r/4)4 = (quarterly compounding)
$23,000 (1+0.0425/4) 4 = $28,994.38
Annually = P × (1 + r) = (annual compounding)
$5,000 x (1+0.066) = $5,330
Is this correct?
Then I have to use a worksheet and I have no clue how to do this one.
SPREADSHEET:
Set up the formula for compound interest for Option 1 and the formula for Future Value of an Annuity for Option 2 in an Excel spreadsheet to calculate the amount earned at the end of 5 years. Be sure to label all variables in your spreadsheet. Be sure to upload your spreadsheet for formula verification.
You seem to be on the right track. We appreciate the feedback.
This is not my field of expertise but one of our other teachers might be able to help.
Taking option 1 from first principles
At time 0 there is $23000
after quarter 1 there is $23000x(1.0425)
after quarter 2 there is $23000x(1.0425)x1.0425
after quarter n there is $23000x(1.0425)^n
With option 2
at time zero there is $5000
after year 1 there is $5000x1.066+$5000
after year 2 there is $5000x1.066x1.066+$5000+45000
after year n there is $5000x(1.066)^n+$5000x(n)
I am not quite sure what you plan to do with these. Initially option 2 is the better, but after about 25 years Option is better. You need to plot these to decide, or solve mathematically.
In the question Option 1 does not state annual interest which your formula implies.
And from my post
after year 2 there is $5000x1.066x1.066+$5000+45000
should be
after year 2 there is $5000x1.066x1.066+$5000+$5000
I got it now. I understand. Thanks so much for your help. Perfect!!!