Question

Susan invests $Z at the end of each year for seven years at an annual effective interest rate of 5%. The interest credited at the end of each year is reinvested at an annual effective rate of 6%. The accumulated value at the end of seven years is $X. Lori invests $Z at the end of each year for 14 years at an annual effective interest rate of 2.5%. The interest credited at the end of each year is reinvested at an annual effective rate of 3%. The accumulated value at the end of 14 years is $Y.

Required:
Calculate Y/X.

Answer 1

Answer:

2.02955

Step-by-step explanation:

Given that:

Susan invests $Z as each year ends for seven years.

So we assume that Z = 1

Susan's accrued value comprises $7 invested each year at a 6 percent annual effective rate.

The cashflow interest:

The cashflow of Susan interest payments are:

Payments   Time

0                     1

0.05               2

2(0.05)           3

3(0.05)           4

4(0.05)            5

5(0.05)            6

6(0.05)            7

The accumulated value of this cash flow is:

$(0.05)I_{6\%} = (0.05) \dfrac{((1+0.06)_{6\%} - 6)}{0.06} \\ \\ \implies 1.1653$

So Susan accumulated values is:

X = 7 + 1.1653

X = 8.1653

Lori's accumulated value is $14, which she has set aside to plan her cash flow for interest.

The cashflow of Lori interest payments are;

Payments    0     0.025     2(0.025)       3(0.025)    .........   13(0.025)

Time             1        2              3                    4            ..........  14

The accumulated value of cash flow is:

$(0.025 )(I)_{3\%} =(0.025) \dfrac{(1+0.03)_{3\%}-13}{0.03}\\ \\= 2.5719$

Now, Lori's accumulated value is:

Y = 14 + 2.5719

Y = 16.5719

Since; Susan value X = 8.1653

Lori's value Y = 16.5719

∴

$\dfrac{Y}{X}= \dfrac{16.5719}{8.1653}$

= 2.02955