Reference no: EM132906718

Albert Einstein reportedly said, "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it." Regardless of whether Einstein uttered these exact words, the essence of his statement is still immensely powerful and cannot be disputed. For anyone who wants to build lasting wealth, understanding and harnessing the power of compound interest is essential. For the more visual of you, imagine, if you will, building the bottom part of a snowman. It starts with a snowball (or initial investment). You roll it around in the snow and it slowly gets bigger (interest on the investment). A slow and monotonous process until something wonderful becomes apparent - the snowball not only gets bigger and bigger, but at a faster and faster rate (interest on the interest). Your friend, Mike Szyslak wants be a millionaire, and he found several ways applicable. But he is still hesitating among the various options and comes to you for financial advice. Complete each of the options, below, with your group.

Problem 1: His uncle promised to invest his business $100,000 per year over the next 15 years at the beginning of each year, and the required rates over next 15 years are expected be 4% per annual. Can you help him know what is the present value of such an investment? What if the annual rate of expected return is 6%?

Problem 2: He considers saving money to become a millionaire. Starting at age 20, every night Mike takes $5 out of your pocket and put it in a manila envelope. At the end of the year, he takes the money from the envelope and invests in a stock fund with an average annual yield of 10%. Will the amount he has in the account ensure him a millionaire when you retire at age 65? What if he starts saving at age 40?

Problem 3: He sets aside $50,000 into a saving account now, and will deposit $50,000 into the account at the beginning of each year for next 15 years. If the interest rate is 10% per annual, Will he become a millionaire in 15 years?