Which of the following choices will result in a greater future value at age 65?
Choice number 1 is to invest $3,000 per year from ages 20 through 26 (a total of seven investments) into an account and then leave it untouched until you are 65 (another 39 years). Choice number 2 is to begin at age 27 and make $3,000 deposits into an investment account every year until you are 65 years old (a total of 39 investments). Each account earns an average of 10% per year. (The investments are end-of-year payments.)
A) Choice 1 is better than choice 2 because it has a FV of $1,304,146.89, which is greater than choice 2 FV of $1,204,343.33.
B) Choice 2 is better than choice 1 because it has a FV of $1,304,146.89, which is greater than choice 1 FV of $1,204,343.33.
C) Choice 2 is better than choice 1 because it has a FV of $1,204,343.33, which is greater than choice 1 FV of $1,171,042.63.
D) Choice 1 is better than choice 2 because it has a FV of $1,288,146.89, which is greater than choice 2 FV of $1,204,343.33.
Answer: C
Explanation: C) Choice 1: FV = PMT × × (1 + r)n = $3,000 × × (1.10)39 = $1,171,042.63.
Choice 2: FV = PMT × = $3,000 × = $1,204,343.33.
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