Question

8. Your grandmother recently surprised you, and gave you $4,000 expressly for the purpose of starting your retirement savings. Her only stipulation is that you have to invest the money now, and not touch any of it for the next 40 years (at which point you plan to retire). What will the value of this account be at the end of the 40 years under each of the following return assumptions (assume annual compounding)? a) 6% per year b) 12% per year c) 18% per year

Answer 1

a) Under annual compounding and at the rate of 6% interest, the value in the account after 40 years will be computed as V(i = 6%) = 4000(1 + 6%)^40 = $41,142.90

b) Under annual compounding and at the rate of 12% interest, the value in the account after 40 years will be computed as V(i = 12%) = 4000(1 + 12%)^40 = $372,204

c) Under annual compounding and at the rate of 18% interest, the value in the account after 40 years will be computed as V(i = 18%) = 4000(1 + 18%)^40 = $3,001,513