Time value of money Glenn & Pat are both 22 years old, fresh out of college with

ID: 2818584 • Letter: T

Question

Time value of money Glenn & Pat are both 22 years old, fresh out of college with good jobs. They both want to retire 40 years from now. They plan to save the following amounts of money per year until retirement. Years 1 10 11 20 21 30 31-40 Glenn $0 $5,000 $25,000 $30,000 Pat $10,000 $15,000 $0 $0 Suppose they both want to retire after 30 years, and each has a life expectancy of about 30 years. Using the same 8% return, how much can Pat withdraw per year for 30 years? A. 51,900 B. $44,770 C. $101,650 D. $ 79,912

Explanation / Answer

Correct option is > C. $101,650

$1,144,343 is correctly calculated by you. It will become present value after 30 years for that time hence:

Payment = Present value x Rate x (1+Rate)^Years / ((1+Rate)^Years - 1)

PMT = |PV| x R% x (1+R%)^N / ((1+R%)^N - 1)

PMT = 1,144,343 x 8% x (1+8%)^30 / ((1+8%)^30 - 1)

PMT = 101,649.05 or ~ $101,650

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Alternate way to solve

Using financial calculator BA II Plus - Input details:

I/Y = Rate/Frequency =

8.000000

FV = Future value =

N = Total payment term x Frequency =

PV = Present value of Loan =

-$1,144,343

CPT > PMT = Payment =

$101,649.05