Problem: As a financial planner a client comes to you for investment advice. After meeting with him and understanding his needs, you offer him the following two investment options:
Option 1: Invest $20,500 in a savings account at 5.4% interest compounded quarterly.
Option 2: Invest into an ordinary annuity where $4,500 is deposited each year into an account that earns 7.9% interest compounded annually.
SPREADSHEET:
Set up the formula for compound interest for Option 1 and the formula for Future Value of an Annuity for Option 2 in an Excel spreadsheet to calculate the amount earned at the end of 5 years. Be sure to label all variables in your spreadsheet.
MEMO:
After creating the spreadsheet with the two different investment options, write a memo that addresses the following points for your client:
A) Explain to your client what compound interest is.
B) Explain to your client what an annuity is.
C) From the calculations in the Excel spreadsheet for Option 1 and Option 2, explain which investment option is better for your client and why.