6. You have been contributing $1,000 per year for the past 12 years to your comp
ID: 2808157 • Letter: 6
Question
6. You have been contributing $1,000 per year for the past 12 years to your company’s 401(k). The company has provided a 50% match and added to your account annually. If the 401(k) investments have been earning an average of a 12% annual return, how much is your account worth? 7. The local bank is offering a 2-year CD (certificate of deposit) at 8%. How much will you have when a $1,000 CD matures? 8. Your competitor offers you $7,000 per year for the next 5 years for the right to a company patent. You instruct your lawyer to negotiate an immediate lump sum payment instead. Assuming a 6% rate, what is the least you would be willing to accept? 9. A friend borrows $2,000 from you to start a business. She agrees to repay you $2,600 in 3 years. Assuming that you passed up an investment that would have earned you an annual return of 8%, did you get a good deal?
Explanation / Answer
Answer
6. Annual Salary = $2000 per year
Total time during investment = 12 years
Employer part = 50%
Total Savings = $32,651
7. Maturity amount after 2 years = $1000-1+.08)^2 = $1166.40
9. Investment of $2000 at 8% for 3 years
maturity Amount = $2000(1.08)^3 = $2519.42
so this is a bad deal for my friend. he lost $481 by doing this investment.
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