Your grandparents are talking about their retirement in a year. They told you th
ID: 2818162 • Letter: Y
Question
Your grandparents are talking about their retirement in a year. They told you that they should have enough in their retirement funds to pull $50,000 a year for 20 years, starting one year from today. If the discount rate is 5 percent, how much should they have in their retirement account now? Round to the nearest cent. Do not include any unit (If your answer is $111.11, then type 111.11 without $ sign.)
You just welcomed a new born boy. You want him to go to Harvard and you estimated that he will need $80,000 a year for 4 years starting 18 years from today. You are wondering how much money you need to invest in today in an investment gives 4 percent annual return to pay your son’s cost of college. How much do you need now? Round to the nearest cent. Do not include any unit (If your answer is $111.11, then type 111.11 without $ sign.)
Your friend brought up an investment opportunity that will generate cash flows of $5,000, $5,300, and $6,000 next three years, respectively. If your required rate of return on this investment is 12%, how much at most are you willing to pay? Round to the nearest cent. Do not include any unit (If your answer is $111.11, then type 111.11 without $ sign.)
Explanation / Answer
1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$50000[1-(1.05)^-20]/0.05
=$50000*12.46221034
=$623,110.52(Approx).
2.Present value=Cash flows*Present value of discounting factor(rate%,time period)
=$80000/1.04^18+$80000/1.04^19+$80000/1.04^20+$80000/1.04^21
=$80000[1/1.04^18+1/1.04^19+1/1.04^20+1/1.04^21]
=(80000*1.863491093)
=$149079.29(Approx).
3.
Present value=5000/1.12+5300/1.12^2+6000/1.12^3
which is equal to
=$12960.09(Approx).
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