Reference no: EM1350278
Planning Investments. Your uncle has $90,000 that he wishes to invest now in order to use the accumulation for purchasing a retirement annuity in ?ve years. After consulting with his ?nancial adviser, he has been offered four types of ?xed income investments, labeled as investments A, B, C, and of each of D. Investments A and B are available at the beginning the next ?ve years (call them years 1 to 5). Each dollar invested in A at the beginning of a year returns $1.20 (a pro?t of $0.20) two years later, in time for immediate reinvestment. Each dollar invested in B at the beginning of a year returns $1.36 three years later. Investments C and D will each be available at one time in the future.
Each dollar invested in C at the beginning of year 2 returns $1.66 at the end of year 5. Each dollar invested in D at the beginning of year 5 returns $1.12 at the end of year 5.
Your uncle is obligated to make a balloon payment on an existing loan, in the amount of $24,000, at the end of year 3. He wants to cover that payment out of these funds as well.
a. Devise an investment plan for your uncle that maximizes the amount of money that can be accumulated at the end of ?ve years. How much money will be available for the annuity in ?ve years?
b. Describe the pattern in the optimal plan.
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