Question

Lydia is the CFO of Ko Go Inc. Lydia plans to invest $500 per month for the next five years in a mutual fund averaging an annual return of 10%. At the end of the five years, Lydia wants to invest the entire amount to yield 8% for 10 years. If the preceding events occur as planned, Lydia would like to know how much she will have 15 years from now.

A. $17,444

B. $38,719

C. $57,983

D. $83,590

Answer 1

Answer is D.

This question requires application of time value of money - concept of FV of annuity and FV of a lumpsum amount.

Every month $500 is deposited for 5 years, which implies this is an annuity

P = 500, r = 10%/12 = 0.833%, n = 5 * 12 = 60 months

FV = $38,718.54 ---> Amount accumulated over 5 years

Now, this amount would be invested in an account that returns 8% for 10 years.

FV = PV * (1 + r)ⁿ

FV = 38,718.54 * (1 + 0.08)¹⁰

FV = 38,718.54 * 2.1589

FV = $83,590.42 ----> Answer D