Mr. Miser who is 35 years old has just inherited 11,000 and decides to use the w

Question

Mr. Miser who is 35 years old has just inherited 11,000 and decides to use the windfall towards his retirement. He places the money in a bank which promises a return 6% per year until his planned retirement in 30 years. Of his funds earn 6% interest compounded annually, how much will he have at retirement?

You are considering two lottery payment options: option A pays $10,000 today and Option B pays $1,500 for the next ten years. Assume you can earn 6 percent on your savings. Which option will you choose if you base your decision on present values?

If you invest $100,000 today 12% per year over the next 15 years, what is the most you can spend in equal amounts out of the fund each year over that time:? How much if you take semi-annual withdrawals?

You borrow $74,441 and will pay the loan back over the next five years. Payments will be made semi-annually and interest rate is 6 %. How much are your payments?

You want to have $1,000,000 in cash in inflation adjusted dollars when you retire. You are now 20 and plan to retire T 60. YOU CAN EARN 3% a year above inflation. How much should you put away every year to meet the goal?

You are a new parent of twins. Looking at little bubba and sissy in their crib, you realize that bubba will get a partial scholarship to college while sissy will require you to pay the full tuition and room and board, in 18 years Bubba will require $30,000 a year for four years and Sissy will require 440,000 a year for four years. Starting in one year, how much will you have to save fund their college education such that you will not have to put away another dollar once college starts? Use an average 8% return for your investment and discounting cash flows.

Explanation / Answer

FV=11000*(1.06)^30 63178.40 PV of A 10000 PV of Annuity of B=(1500,N=10,i=6%)=7.3601*1500 11040.15 In case of Annual Interest factor=(1.12)^15 5.47 In case of semi-annual Interest factor=(1.06)^(2*15) 5.74 Equated Annual Amout for annual withdrawal=A=100000*(i*F)/(F-1)=100000*(0.12*5.47)/(5.47-1) 14684.56 Equated Annual Amout for semiannual withdrawal=A=100000*(i*F)/(F-1)=100000*(0.06*5.74)/(5.74-1) 7265.82 Interest Factor=(1.03)^(5*2) 1.344 Equated Semiannual Amount=74441*(i*F)/(F-1)=74441*(0.03*1.344)/(1.344-1) 8725.18 Total payment in 10 instalments=10*8725.18 87251.8 Interest Factor=(1.03^40) 3.26 PV of Annuity=A*(F-1)/F*I)=A*(3.26-1)/(3.26*0.03)=1000000 or 23.10A=1000000 or A=1000000/23.10 43290.04 So every year an amount of 43290.04 to be deposited. Year of Fund Need Amount 18 470000 19 470000 20 470000 21 470000 PV=470000/(1.08^18)+470000/(1.08^19)+470000/(1.08^20)+470000/(1.08^21) 420727.57 He has to keep aside 420727.57 today.

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