As a financial planner a client comes to you for investment advice. After meeting with him and understanding his needs, you offer him the following two investment options:
Option 1: Invest $20,500 in a savings account at 5.4% interest compounded quarterly.
Option 2: Invest into an ordinary annuity where $4,500 is deposited each year into an account that earns 7.9% interest compounded annually.
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.
After creating the spreadsheet with the two different investment options, write a memo that addresses the following points for your client:
?Explain to your client what compound interest is.
?Explain to your client what an annuity is.
?From the calculations in the Excel spreadsheet for Option 1 and Option 2, explain which investment option is better for your client and why.
Please see the attached excel file for the problem
Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also earns interest. A loan, for example, may ...
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Concepts: BEP and TIE, Annuity vs. Annuity due, Loan Amortization, Present and Future Value
b. Briefly discuss the concept of relevant cash flows when evaluating a new project.
1- Explain the relationship between (i) discount rate and present value, and (ii) compound
rate and future value.
2- Why is the future value for an annuity due always higher than that of an ordinary
3- Although the payment made on an amortized loan is constant, it can be decomposed
into two components. What are the TWO (2) components? Describe the patterns of each
component over time.
4- Your company has recently announced that its net income was lower than last year.
However, analysts found that the company's net cash flow increased. What factors could
explain this discrepancy?