Reference no: EM133005890

Question - You just became a parent for the first time and are looking to help your child become financially independent. You contact your good friend Domenic Collallio who works for a major Bay Street investment firm. He advises you of an investment that his company offers new parents such as yourself. This investment would involve you making six payments on your child's birthday, for only the next 6 years.

Year 1 800

Year 2 900

Year 3 1,000

Year 4 1,000

Year 5 1,100

Year 6 1,200

When your newborn child reaches 65, they will receive $500,000 from this investment. This will hopefully provide the child with enough money for their retirement. You hope to spend some quality time with your child and possibly do some travelling to south east Asia with this money. You may also require hip replacement surgery at this time which is expected to cost $85,000. You hope that your child will lend you some of this money to have this surgery.

After consulting with your interest rate advisor, he informs you that you should be using a 12% rate for the first six years and 8% rate for all subsequent years after that.

Is this investment worth purchasing? Are there any other considerations you should be thinking of when entering into a financial arrangement such as this?