Prob Set 1.2 5. What if the appropriate interest rate/discount rate is 4.5%, whi

Question

Prob Set 1.2

5. What if the appropriate interest rate/discount rate is 4.5%, which option would you choose? Explain why.

6. Max has decided to retire once he has $1,500,000 in his retirement account. At the end of each year, he will contribute $12,000 to the account, which is expected to provide an annual return of 9.75%. To the nearest whole year, how many years will it take until Max can retire?

7. Suppose Max’s friend, Jim, has the same retirement plan, saving $12,000 at the end of each year and retiring once his account reaches $1,500,000. However, Jim’s account is expected to provide an 11.5% annual return. How much sooner can Jim retire? (Round to the nearest year.)

8. After 20 years, neither Max nor Jim will have enough money to retire, but how much more will Jim’s account be worth at this time?

Explanation / Answer

6. PMT = -12,000, FV = 1,500,000, rate = 9.75%, PV = 0

use nper function in Excel

number of years = 27.72 = 28 years

7. PMT = -12,000, FV = 1,500,000, rate = 11.5%, PV = 0

number of years = 25.10 = 25 years

8. PMT = -12,000, n = 20, rate = 9.75%, PV = 0

use FV funciton in Excel

amount in Max's account in 20 years = 668,088.3359

replace rate with 11.5%

amount in Jim's account = 816,060.9550

difference = 816,060.9550 - 668,088.3359 = 147,972.62

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