Janet Fog's uncle, Pete Moore, promised her a gift of $30,000 upon her graduation from law school or $1500 every quarter for the next four years. if the money could be invested at 12% compounded quarterly, which offer should Janet choose?

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TraceyTurbo TraceyTurbo

25-09-2017
Mathematics

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Janet Fog's uncle, Pete Moore, promised her a gift of $30,000 upon her graduation from law school or $1500 every quarter for the next four years. if the money could be invested at 12% compounded quarterly, which offer should Janet choose?

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Aliwohaish12 Aliwohaish12 · Answer 1 · 2017-09-25T18:41:51+02:00

First calculate the future value of the annuity
The formula to find the future value of an annuity ordinary is
Fv=pmt [((1+r/k)^(kn)-1)÷(r/k)]
Fv future value?
PMT quarterly payment 1500
R interest rate 0.12
K compounded quarterly 4
N time 4 years
Fv=1,500×(((1+0.12÷4)^(4×4)
−1)÷(0.12÷4))
=30,235.32

Now compare the amount of the annuity with amount of the gift
30,235.32−30,000=235.32
So as you can see the amount of the annuity is better than the amount of the gift by 235.32

Second offer is better

Hope it helps!