Reference no: EM132975304

Question - Rhonda plans to start saving for retirement and has the option of choosing between two investment opportunities.

Option One: Invest $6,000 per year from ages twenty-five through thirty-two (a total of 8 investments) into an account and then leave it untouched until she is sixty-five years old (33 years)

Option Two: Depositing $6,000 into an account every year beginning at age thirty-three until Rhonda is sixty-five years old (a total of 33 investments).

Each account earns an average of 11.25% per year. (The investments are end-of-year payments)

a. Which of the two options presented above will result in a greater future value by the time Rhonda reaches sixty-five years old?

b. Rhonda is planning to expand her investment portfolio. Her friend Martha owns a British CONSOL that pays $205 per year forever and has a discount rate of 8.25% per year. Martha wants to liquidate her investment and offers to sell Rhonda all but 25 cash flows (the first to be received one year from today) for $650. In other words, Martha will keep the first 25 cash flows and Rhonda will get all the other payments. Is this a good buy for Rhonda given the discount rate is 8.25%?

c. Rhonda has saved $1,200,000 in an account. Her goal is to have 1,500,000 saved up to use as down payment on a house in the next 5 years. If her money is sitting in an account earning 2.50% per year, would Rhonda be able to meet her goal of $1,500,000 in 5 years?

d. Rhonda is considering purchasing her dream car at the end of six years. Her bank is paying 0.625% per month, how much would she need to invest today to meet her objective?