Prudence and Margo are identical twins. Early on, it became clear that Prudence was a bit of

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Prudence and Margo are identical twins. Early on, it became clear that Prudence was a bit of a plodder whereas Margo was the fun-loving, carefree type. At age 15, both started working regularly after school. Prudence became a saver while Margo specialized in stimulating the economy with immediate purchases. Following her grumpy old grandfather’s advice, Prudence began making annual contributions of $2,000 to an IRA (individual retirement account) on her 16th birthday. Margo’s response to her grandfather’s suggestion was “gimme a break.” Two strange events occurred, however, on their 23rd birthday. First, Prudence made her annual $2,000 IRA contribution, bringing her balance to $21,273.26. She never contributed again. Second, Margo promised to begin making $2,000 annual contributions to an IRA on her 26th birthday. She kept her promise and continued through her 65th birthday, which is today. Tomorrow, each will begin making withdrawals from their IRAs, which have been earning an 8% return.


Required

A. How much cash did Prudence contribute to her IRA over the years? How much cash did Margo contribute?

B. What is the balance in Prudence’s IRA account today?

C. What is the balance in Margo’s IRA account today?

D. Suppose Prudence had never stopped making contributions to her IRA. What would be her account balance today?

E. What lesson does this suggest about the power of compound interest?


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Related Book For  book-img-for-question

Financial Accounting Information For Decisions

ISBN: 978-0324672701

6th Edition

Authors: Robert w Ingram, Thomas L Albright

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