Question

2. Dave’s dad is saving money for his retirement. In the last five years; he invests $1,800 every 6 months in a mutual fund that pays 8% compounded semi-annually. Now, the rate drops to 5.8% compounded quarterly and he wants to deposit $1,200 every quarter for another five years. How much money will he has at the end of ten years?

Answer 1

First we have to find the future value for first case and can be found using FV function in EXCEL

=FV(rate,nper,pmt,pv,type)

Here the compounding is semi-annual

rate=8%/2=4%

nper=2*5=10

pmt=1800

pv=0

=FV(4%,10,-1800,0,0)

FV=$21,611

Now we have to find the future value for the second case in the same way

Here the quarterly compounding takes place

rate=5.8%/4=1.45%

nper=4*5=20

pmt=1200

pv=0

=FV(1.45%,20,-1200,0,0)

FV=$27,612.2

Now add both the furure values to find the end of 10 years value=$21611+$27612.2=$49,223.2