Question

You will need at least $5,100 in four years and your friend says she can either loan you $5100 all at once four years from now or she can deposit $1275 in your savings account at the end of each year for the next four years. Your savings account earns 9% Interest, compounded annually. Which option would be worth more to you four years from now, and how much more? (Future Value of $1. Present Value of $1. Future Value Annuity Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.) Multiple Choice The 55,100 in four years will be worth $731 more than the annual deposits 0 C ) The $5,100 in four years will be worth $539 more than the annual deposits 0 The annual deposits will be worth $539 more than the $5,100 in four years. 0 0 O The annual deposits will be worth $731 more than the $5,100 in four years.

Answer 1

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Answer:

Solution - A

Option D - Annual deposits more than $5,100 by 731$ because,

FV = $ 1275 [ ( 1+0.09)⁴ -1] $\div$ 0.09

FV = $ 5,830.74

Difference between annual deposits and loan = $5,830.74 - $ 5100

Difference between annual deposits and loan = $ 731

Solution - B

Option B

is calculated by subtracting each year's cash flows from the initial investment until zero is reached because, we use the formula Initial investment/Annual net cash flow when the cash flows are equal and when unequal, we find the cash flow at which the total cashflows equals initial investment