4. (a) If you will be making equal deposits into a retirement account for 10 yea

Question

4.         (a) If you will be making equal deposits into a retirement account for 10 years (with each payment at the end of the year), how much must you deposit each year if the account earns 4% compounded annually and you wish the account to grow to $1,000,000 after 30 years (in time 30)?

            (b) How does your answer change if the account pays interest compounded monthly at an annual rate of 4%? Note: use monthly compounding for all calculations.

5. (a) You belong to an unusual pension plan because your retirement payments will continue forever (and will go to your descendants after you die). If you will receive $48,000 per year at the end of each year starting 30 years from now (i.e., the first payment is in time 30), what is the present value of your retirement plan if the discount rate is 4.5%?

(b) How does your answer change if you receive $4,000 per month every month forever (in perpetuity) starting 30 years from today (in monthly time period 360) and you compound monthly?

Explanation / Answer

4(a)

Compute the present value after 10 years.

using the excel fuction

=PV(0.04,20,0,-1000000) = $456,386.95.

Therefore, the present value after 10 years taht is after 10 equal annual payments is $456,386.95.

Now, Compute the equal annual savings for 10 years.

using the excel function,

=PMT(0.04,10,0,-456386.95) = $38,012.90.

Therefore, the equal payment to be at the end of the year for 10 years is $38,012.90.

4(b)

Compute the present value after 10 years.

using the excel fuction

=PV((0.04/12),240,0,-1000000) = $449,927.14.

Therefore, the present value after 10 years taht is after 10 equal annual payments is $449,927.14.

Now, Compute the equal annual savings for 10 years.

using the excel function,

=PMT((0.04/12),120,0,-449,927.14) = $3.04.

Therefore, the equal payment to be at the end of the month for 120 months is $3.04.

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