Question

Oil and gas stock prices are estimated to increase by 5% each year for the next...

Oil and gas stock prices are estimated to increase by 5% each year for the next three years. The cost of one share is $500 in year 1. How much money should be placed in a savings account now to have enough money to buy one share per year for the next three years? Assume the savings account pays a 6% annual interest rate.

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Answer #1

Cost of one Share in year 1 =$500

Calculating the money in Saving account today to buy one share each year using Present vlaue of Growing annuity:-

​​​​​​

Where, C= Periodic Annuity = $500

r = Periodic Interest rate = 0.06

g = Growth rate of share = 0.05

n= no of periods = 3

​​​​​​

Present Value = $1401.79

So, money should be placed in a savings account now to have enough money to buy one share per year for the next three years is $1401.79

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