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 (refer to Chapter): Invest $5,000 in a savings account at 6.6% interest compounded monthly.
Option 2 (refer to Chapter): Invest into an ordinary annuity where $1,100 is deposited each year into an account that earns 4.8% 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 6 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:
- Explain to your client what compound interest is.
- Explain to your client what an annuity is.
- From the calculations in the Excel spreadsheet for Option 1 and Option 2, explain which investment option is better for your client and why.