You are considering two savings options. Both options offer a 4% rate of return. The first option is to save $1,200,$1,500,and $2,000 a year over the next three years,respectively. The other option is to save one lump sum amount today. If you want to have the same balance in your savings at the end of the three years,regardless of the savings method you select,how much do you need to save today if you select the lump sum option?
A) $4,318.67
B) $4,491.42
C) $4,551.78
D) $4,607.23
E) $4,857.92

Question

Quizplus · Accepted Answer

The correct answer is A.The future value of the first option is $1,200*(1+0.04)^3 + $1,500*(1+0.04)^2 + $2,000*(1+0.04) = $4,318.67. Therefore, the lump sum amount that needs to be saved today is $4,318.67.

You Are Considering Two Savings Options