Question

Ethan is planning for his retirement. He has narrowed it down to two investment options. The first is an IRA where monthly payments are made, in the amount of $416.66, for 30 years. The second is a Roth IRA where annual payments are made, in the amount of $5000, for 30 years. If both compound interest at a rate of 2.5%, determine which account will yield the largest future value for Ethan, and how much greater that value will be than that of the other account. Round your final answer to the nearest cent. a. IRA; $3,552.72 b. Roth IRA; $3,552.72 c. IRA; $1,470.39 d. Roth IRA; $1,470.39 Please select the best answer from the choices provided A B C D

Answer 1

Answer: B. IRA; $3553.72

Explanation:

First Account

Payments $416.66, N = 30 x 12 = 360

FV = P((1 + r)^n - 1)/r

FV = 416.66((1 + 0.0.025/12)^360 -1)/(0.025/12)

FV = 223066.23898

Second Account

FV = P((1 + r)^n - 1)/r

FV = 5000((1 + 0.0.025)^30 -1)/0.025

FV = 219513.51582

Difference =223066.23898 - 219513.51582  = $3552.7231 = $ 3552.72

First account (IRA) will yield the largest future value for Ethan

Answer 2

The first account will yield the largest future value for Ethan and the value will be IRA; $3,552.72 greater than that of the other account.

What is an investment?

An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. An investment involves putting capital to use today in order to increase its value over time.

When an individual purchases a good as an investment, the intent is not to consume the good, but rather to use it in the future to create wealth.

Thus, option A is true as the value will be IRA; $3,552.72 greater than that of the other account.

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