The Power of Compounding Worksheet



The Power of Compounding Worksheet

Question A

David was going through three different investment options and was working out which would offer the best return in the long run.

i) Invest €10,000 in a project that is expected to yield 9.5% return for six years. At the end of that time frame, he will have to pay 25% tax on the gain after the €1270 tax free allowance.

ii) Invest €5,000 in an interest earning account of 6% over five years and pay 25% DIRT (Deposit Interest Retention Tax) on all of the interest at the end of the period. Invest the other €5000 in his pension, which is tax free and expected to earn 12% per annum for the same time frame.

iii) Invest €10,000 in Stock A expected to yield 5% for two years, then transfer the total amount to Stock B which is expected to yield 10% for two years and then finally, transfer that total amount to Stock C, expected to yield 8% for two years.

Question B

A farmer is making out his will, but he has conundrum. His farm is worth €400,000 but only one of his two daughters has shown an interest in running the business, when he retires. He wants to ensure that his other daughter is provided for. He is thirty seven now and the average life span of a man is seventy eight. How much would he need to put away now at the rate of 8% compound per annum, so as to make sure that his other daughter has around the same as her sister at the time of his death?

Question C

A person saves €2,000 per annum from the age of 25 and stops saving at the age of 32. They get a theoretical 10% return per annum until age 65.

Now his friend starts at the age of 33 and saves €2,000 per year until they are 65 and get the same 10% return per annum.

Who has the most saved at age 65?

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