Question

The 25 year old invests $2,000 a year until the age of 65
The 35 year old invests $2,000 a year until the age of 65

We’ll assume they both get the same rate of return on their dollar, in this example we’ll use 8%. Where will each of them be when they reach the age of 65?

What is the difference in the two investment choice? Place the difference between the two $ amounts as your final answer.

use two decimals.

Answer 1

FV = CF * [ [ (1+r)^n ] - 1 ] / r

r is int rate per anum

n is no. of years

OPtion 1:

= $ 2000 * [ [ (1+0.08)^40 ] - 1 ] / 0.08

= $ 2000 * [ [ (1.08)^40 ] - 1 ] / 0.08

= $ 2000 * [ [ 21.7245 ] - 1 ] / 0.08

= $ 2000 * [ 20.7245 ] / 0.08

= $ 2000 * [ [ 21.7245 ] - 1 ] / 0.08

= $ 518,113.04

OPtion 2:

= $ 2000 * [ [ (1+0.08)^30 ] - 1 ] / 0.08

= $ 2000 * [ [ (1.08)^30 ] - 1 ] / 0.08

= $ 2000 * [ [ 10.0627 ] - 1 ] / 0.08

= $ 2000 * [ 9.0627 ] / 0.08

= $226, 566.42

Difference = $ 518,113.04 - $ 226,566.42

= $ 291546.62