Reference no: EM131446851
You are opening an IRA that earns 6% interest compounded daily. You wish to make monthly deposits into the IRA. You also want to purchase a new car for $25,000. You plan to set aside $800 every month, which will be divided between your IRA and your car payment. You are considering between the following two options:
Option 1: Make a down payment of $5,000 on the vehicle and borrow $20,000 at an APR of 8%, compounded monthly for 4 years. During these 4 years, you will deposit what remains of the $800 in the IRA (i.e., you will deposit $800 minus your car payment). After the vehicle is paid off at the end of 4 years, you will deposit $800 a month into your IRA.
Option 2: Make a down payment of $5,000 on the vehicle and borrow $20,000 at an APR of 8%, compounded monthly for 10 years. During these 10 years, you will deposit what remains of the $800 in the IRA (i.e., you will deposit $800 minus your car payment). After the vehicle is paid off at the end of 10 years, you will deposit $800 a month into your IRA.
Which option should you choose if your goal is to maximize the amount in your IRA at the end of 30 years?
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