Your goal is to have $1,000,000 in 20 years in an investment account that is available for you to withdraw starting 21st year. To that end, you are evaluating multiple options. Which option would you prefer and why? For this problem, assume that you have required cash on hand at the present time for investment. 

Option #1: Put aside lump sum today, at 8% interest compounded annually. 

Option #2: Invest a specific amount over time (over the next 18 years) at 10% compounded annually. 

Option #3: Put aside a lump sum today, at 8% interest compounded annually for 10 years, at which point the account balance in the 10th year reinvests in another account over next 10 years (specific amount for this account is withdrawn and reinvested in another account every year) at 10% interest compounded annually. The first account stops earning interest at the end of 10th year.

Hint: All cash flows must be brought at the same point for a true comparison. Also remember, a dollar today is worth more than a dollar tomorrow.

Answer rating: 100% (QA)

Answer Option 1 we need to invest 100000010820214548 today Option 2 ... View the full answer