Alison Conroy is early in her career and is now employed as the managing editor

Question

Alison Conroy is early in her career and is now employed as the managing editor of a well-known business journal. Although she thoroughly enjoys her job and the people she works with, she would really like to be a literary agent. She would like to go on her own in about six years and figures she'll need about $ 40,000 in capital to do so. Given that she thinks she can make about 8 percent on her money, use Worksheet 11.1 to answer the following questions.

How much would Alison have to invest today, in one lump sum, to end up with $ 40,000 in six years? Round the answer to two decimal places.

$ 25,206.79

If she's starting from scratch, how much would she have to put away annually to accumulate the needed capital in six years? Round the answer to two decimal places.

$

How about if she already has $ 20,000 socked away; how much would she have to put away annually to accumulate the required capital in six years? Round the answer to two decimal places.

$

Explanation / Answer

Alison need 40000 after six years

Annual interest rate = 8% per annum

(a) by the formula of Compound Interest CI = Principal*(1+rate of interest)^n

Where CI = 40000

rate of interest = 8%

n = 6 years

suppose principal = x

40000 = x*(1+.08)^6

x = 40000/1.586874

= 25206.79

(b) Now By the help of future value annuity formula = P*[(1+i)^n - 1]/i

where p = periodic payment

r - rate per period

n - no. of periods

suppose periodic payment = x

then 60000 = x*[(1.586874 - 1)/.08]

x = 60000/7.335929

= 8178.92

payment of annuity would be at the end of year.

3. If she socked away 20000 now after 6 year it will become = 20000*(1+.08)^6

= 20000*1.586874

= 31737.50

Alison needs = 60000 - 31737.50 = 28262.50 more

now again the formula of annuity = 28262.50 = x[1.586874-1]/.08

x = 28262.50/7.335929
= 3852.61

Please note all values are in $.

Please comment in case of any query/calrification.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.