Your father is 50years old now and his plan is to retire exactly at th

QUESTION

Your father is 50years old now and his plan is to retire exactly at the age of 60.His goal is to create a fund that will allow him to receiveRs15,00,000 at the time of retirement so that he can start a smallbusiness. He has searched the market and is confused between thetwo options:Option 1: T
This is similar to calculating Annuity of 10 Yrs withInt rate = INT. case A. FV of annuity =FV= Rs 15,00,000,Payment PMT = 9000. Period = 10 yrs. Payments are 6 monthly. Soevery year will have 2 payments. So No of periods Nper = 10*2=20.We need to find Interest rate INT. Present value PV = 0 Formula is FVAn = PMT(FVIFAi,n)However we wil luse Excel Rate function.Rate = RATE(nper, PMT, PV, FV)ie Rate =RATE(10*2,-9000,0,1500000) = 19.06% As we are making a payment, it is a cash outflow & hencehas a negative sign. Case B. FV of annuity =FV= Rs 15,00,000, Payment PMT =9000. Period = 10 yrs. Payments are 4 monthly. So every year willhave 12/4=3 payments. So No of periods Nper = 10*3=30. We need tofind Interest rate INT. Present value PV = 0 Formula is FVAn = PMT(FVIFAi,n)However we wil luse Excel Rate

e = RATE(nper, PMT, PV, FV)ie Rate =RATE(10*3,-2000,0,1500000)= 17.73% As we are making a payment, it is a cash outflow & hencehas a negative sign. Now we may think that Option A is better. However lets see thePayments made in both options.In Option A, nper = 10*2= 20 payments of 9000 each = 20*9000 =1,80,000In Option B, nper = 10*3 = 30 payments of 2000 each = 30*2000= 60,000 Thus we can say that Option B is better as it givesthe same reqd Maturity value of Rs 15,00,000 but at a lowercontribution of rs 60,000. This is magix ofcompounding.

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