question archive Muffin Megabucks is considering two different savings plans in 10 years
Muffin Megabucks is considering two different savings plans in 10 years
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Muffin Megabucks is considering two different savings plans in 10 years. The first plan would have her deposit $500 every six months, and she would receive an interest rate at 7% p.a. (compounding semi-annually). Under the second plan she could deposit $1,000 every year with the rate of interest of 7.5% p.a. (compounding annually). Which plan should Muffin use? (Assuming that the initial deposit of Plan 1 would be made 6 months from now, and with Plan 2, one year from now).
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The second Plan is better since the amount accumulated is larger
We will compute the future value after 10 year in both the Plans
Plan 1:
Future Value of annuity = A* ((1+rate)^n-1)/rate
= 500*((1+7%/2)^(10*2)-1)/(7%/2)
= 500* 28.27968
= 14139.84
Plan 2:
Future Value of annuity = A* ((1+rate)^n-1)/rate
= 1000*((1+7.5%)^(10)-1)/7.5%
= 1000*14.14709
= 14147.09
The second Plan is better since the amount accumulated is larger
