P1) Your goal is to be able to withdraw $4,300 for each of the next seven years

Question

P1) Your goal is to be able to withdraw $4,300 for each of the next seven years beginning one year from today. The return on the investment is expected to be 10%. The amount that needs to be invested today is closest to:

A) 20,934

B) 28,974

C) 37,328

D) 30,100

P2) On January 1, 2014, Woodstock, Inc. purchased a machine costing $35,100. Woodstock also paid $1,100 for transportation and installation. The expected useful life of the machine is 5 years and the residual value is $5,200. How much is the annual depreciation expense assuming use of the straight-line depreciation method?

A) 7,020

B) 7,240

C) 4,983

D) 6,200

Explanation / Answer

A1) For getting $ 4,300 for each of the next seven years (viz. $ 4,300 X 7 = $ 30,100 in total) The amount which is to be invested bearing an interest rate of 10% would be closest to $ 28,974 or Option B Amount to be invested = $ 28,974 Interest thereon = $ 2,897 Total investment = $ 31,871 Yearly returns expected for seven years 4553 $ A2) Cost of Machine Purchased by Woodstock Inc. (including Transportation Costs) = $ 35,100 + $ 1,100 = $ 36,200 Residual value of machine = $ 5,200 Expected useful life of machine = 5 years Annual Depreciation using Straight Line method = 6200 $ The closest amount to this is $ 7,020 hence A is the correct option

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