Julie has just completed the rigorous process of becoming a Certified Financial
ID: 2945151 • Letter: J
Question
Julie has just completed the rigorous process of becoming a Certified Financial Planner (CFP). She is looking forward to working with individuals on saving for retirement. She would like to show her clients the value of an annuity program as one of the best options for investing current earnings in a tax-deferred account.1. If a client puts the equivalent of $55 per month, or $660 per year, into an ordinary annuity, how much money would accumulate in 20 years at 3% compounded annually? (5 points)
Answer:
2. Jackie, a 25 year old client, want to retire by age 65 with $2,000,000. How much would she have to invest annually, assuming a 6% rate of return? (5 points)
Answer:
3. Another client, Wynona, decides that she will invest $5,000 per year in a 6% annuity for the first ten years, then $6,000 for the next ten years, and then $4,000 per year for the last ten years, how much will she accumulate? [Hint: Treat each ten-year period as as separate annuity and compute the Future Value. After the ten years, assume that the value will continue to grow at compound interest for the remaining years of the 30 years. Use tables from Unit 6 to compute compound interest.] (5 points)
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Explanation / Answer
All the questions have to do with the future value of an annuity. To calculate, you will need a financial calculator or refer to the annuity tables in your text book. here is used some annuity tables found at http://www.swlearning.com/finance/brigham/theory11e/pvtables.html
1. Future value of a $660 annuity for 20 years at 3%. If you go to the table (Future value interest factor of an ordinary annuity) and look at the 3% column and down to 20 periods, you will find the factor of 26.870. Times that by 660 and you come up with $17,734.20.
2. On this one use the same table, but this time you know the future value, the term, and the rate, so you need to calculate the payment amount. Go to the 6% column and down to 40 periods and the factor is 154.76. So divide the $2,000,000 by 154.76 and the answer is $12,923 per year.
3. Use the future value of an annuity on each 10 year period separately, and then use the future value of a lump sum to extend the first 2 periods out to the final payout. On the first 10 year period, take the future value of the annuity and find the future value of that lump sum for 20 years at 6%. The factor is 3.207. On the second 10 year period, take the future value of the annuity and and find the future value of that lump sum for 10 years at 6%. The factor is 1.791. When you add together the result from all three periods, the answer is $430,058.
the answer is found in net
hope it helps you clear your questions
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