Jack and Jill are cousins who were both born on the same day, and both turned 25
ID: 2384288 • Letter: J
Question
Jack and Jill are cousins who were both born on the same day, and both turned 25 today. Their grandfather began putting $3,000 per year into a trust fund for Jack on his 20th birthday, and he just made a 6th payment into the fund. The grandfather (or his estate’s trustee) will make 40 more payments until Jack’s 65th birthday (last payment on 65th birthday). The grandfather set things up this way because he wants Jack to work, not be a “trust fund baby,” but he also wants to ensure that Jack is provided for in his old age.
Until now, the grandfather has been disappointed with Jill, hence has not given her anything. However, they recently reconciled, and the grandfather decided to make an equivalent provision for Jill. He will make the first payment to a trust for Jill today, and he has instructed his trustee to make 40 additional equal annual payments until Jill turns 65, when the 41st and final payment will be made. If both trusts earn an annual return of 10%.
37. How much will be there in Jack’s account on his 65th birthday?
a. $2,375,385.96
b. $2,156,714.51
c. $1,327,777.61
d. $3,123,910.59
e. $4,521,854.71
Explanation / Answer
Answer:
Future value of ordinary annuity of $3,000 deposited from 20th birthday to 65th birthday for total 46 periods
= Annuity [{(1+Interest rate)no of periods - 1}/Interest rate]
= $3,000 {(1+0.1)46 - 1}/0.1} = $3000*(79.1795/0.1) = $2,375,385.96 (Ans)
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