Question

Calculating Future Values. You have $20,000 you want to invest for the next 40 years. You are offered an investment plan that will pay you 7 percent per year for the next 20 years and 11 percent per year for the last 20 years. How much will you have at the end of the 40 years? Does it matter if the investment plan pays you 11 percent per year for the first 20 years and 7 percent per year for the next 20 years? Why or why not? t=0 t=20 t= 40 PV=-20,000 FV= ? Stage 1 FV, PV? Stage 2

Answer 1

The future value after 40 years is calculated below:

$Future\, value=Amount\, invested\times \left ( 1+i_{1} \right )^{n_{1}}\times \left ( 1+i_{2} \right )^{n_{2}}$

$Future\, value=20,000\times \left ( 1+0.07 \right )^{20}\times \left ( 1+0.11 \right )^{20}$

$Future\, value=20,000\times 3.869684462\times 8.062311536$

It does not matter if interest rate swaps. This is because the number of years for both interest rates is same. If number of years is different like, 7% for 19 years and 11% for 21 years, then future value will be different.