Exercise 6-8 Leon Weatherspoon, a super salesman contemplating retirement on his
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Question
Exercise 6-8
Leon Weatherspoon, a super salesman contemplating retirement on his fifty-fifth birthday, decides to create a fund on an 12% basis that will enable him to withdraw $16,420 per year on June 30, beginning in 2021 and continuing through 2024. To develop this fund, Leon intends to make equal contributions on June 30 of each of the years 2017–2020.
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Exercise 6-8
Leon Weatherspoon, a super salesman contemplating retirement on his fifty-fifth birthday, decides to create a fund on an 12% basis that will enable him to withdraw $16,420 per year on June 30, beginning in 2021 and continuing through 2024. To develop this fund, Leon intends to make equal contributions on June 30 of each of the years 2017–2020.
Your answer is incorrect. Try again. Click here to view factor tablesHow much must the balance of the fund equal on June 30, 2020, in order for Leon to satisfy his objective? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Balance of the fund equal on June 30, 2020 $
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Your answer is incorrect. Try again. Click here to view factor tablesWhat are each of Leon’s contributions to the fund? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Leon’s contributions to the fund $
Explanation / Answer
PV of annuity P = PMT x (((1-(1 + r) ^- n)) / i) Where: P = the present value of an annuity stream PMT = the dollar amount of each annuity payment r = the effective interest rate (also known as the discount rate) i=nominal Interest rate n = the number of periods in which payments will be made PV = 16420*(((1-(1 + 12%) ^-4)) /12%) PV 49,873.28 Balance required as on June 2020 is 49,873.28 FV of annuity The formula for the future value of an ordinary annuity, as opposed to an annuity due, is as follows: P = PMT x ((((1 + r) ^ n) - 1) / i) Where: P = the future value of an annuity stream PMT = the dollar amount of each annuity payment r = the effective interest rate (also known as the discount rate) i=nominal Interest rate n = the number of periods in which payments will be made FV of annual contribution = Annual Contribution * ((((1 + 12%) ^4) - 1) / 12%) 49,873.28 = Annual Contribution * ((((1 + 12%) ^4) - 1) / 12%) 49,873.28 = Annual Contribution * 4.779328 Annual Contribution= 49,873.28/4.779328 Annual Contribution= 10,435.21
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