Question

In 1979 twin sisters were each given an inheritance of $10,000. One sister (Abby) placed her inheritance in an index fund in the stock market that earned her an average annual return of 9% over the next 40 years. The other sister (Gabby) invested her money in a series of certificate of deposit accounts (CD’s). For the first 20 years Gabby was able to make average annual returns of 5% investing in CD’s, but for the second 20 year period, she earned average annual returns of only 3%. Assume that inflation averaged 3.5% annually for this 40 year analysis period.

(4 pts) How many actual dollars does Abby have today?

(4 pts) How many actual dollars does Gabby have today?

(4 pts) How many real 1979 based dollars does Abby have today?

(4 pts) How many real 1979 based dollars does Gabby have today?

(2 pts) What is the increased buying power that Abby has today as compared to 1979?

(2pts) What is the increased buying power that Gabby has today as compared to 1979?

Answer 1

As per rules I am answering the first 4 subparts of the question

1:Amount that Abby has = Future value=Present value*(1+Rate)^number of periods

= 10000*(1+9%)^40

=314094.2

2: Amount that Gabby has after 20 years= Future value=Present value*(1+Rate)^number of periods

= 10000*(1+5%)^20

= 26532.98

Amount that Gabby has after net 20 years = Future value=Present value*(1+Rate)^number of periods

= 25532.98*(1+3%)^20

=46115.4

3: Real dollars with Abby = Actual dollars/ (1+ Inflation)^n

= 314094.20/ (1+ 0.035)^40

=79331.55

4: Real dollars with Gabby = Actual dollars/ (1+ Inflation)^n

= 46115.4/ (1+ 0.035)^40

= 11647.48