N.Ebriate,a college student at a party university,decides to forego beer drinkin

Question

N.Ebriate,a college student at a party university,decides to forego beer drinking and invest the $100 he saves at the end of each month in a mutual fund that is currently earning 18 percent annually.He has a job where he earns income and invests this money in a Roth IRA.

a. How much will he have in his fund in 4 years on graduation?

b. If he graduates at 22 and leaves this investment in the mutual fund without adding any additional funds,how much will he have at age 60?

c. If he really enjoys his work and decides to leave the money in the fund until age 75,how much will he have?

d. If he never touches this mutual fund and dies at the age of 90,how much will he leave in his estate from only this investment?

Explanation / Answer

Part 1)

The value in 4 years can be calculated with the use of Future Value (FV) function/formula of EXCEL/Financial Calculator. The function/formula for FV is FV(Rate,Nper,PMT,PV) where Rate = Interest Rate, Nper = Period, PMT = Payment and PV = Present Value (if any).

_________

Here, Rate = 18%/12 = 1.5%, Nper = 4*12 = 48, PMT = $100 and PV = 0 [we use 12 as the deposit is monthly]

Using these values in the above function/formula for FV, we get,

Future Value after 4 Years = FV(1.5%,48,100,0) = $6,956.52

_________

Part 2)

The future value of a lumpsum amount can be calculated with the use of following formula:

Future Value of Lumpsum Amount = Amount*(1+Rate)^(Years) [assuming compounding takes annually]

Using the value calculated above, we get,

Future Value of Lumpsum Amount after 60 Years = 6,956.52*(1+18%)^(60 - 22) = $3,748,938.50

_________

Part 3)

The future value of a lumpsum amount can be calculated with the use of following formula:

Future Value of Lumpsum Amount = Amount*(1+Rate)^(Years) [assuming compounding takes annually now]

Using the value calculated above, we get,

Future Value of Lumpsum Amount after 75 Years = 6,956.52*(1+18%)^(75 - 22) = $4,488,844.40

_________

Part 4)

We again need to calculate the future value at 90 years.

The future value of a lumpsum amount can be calculated with the use of following formula:

Future Value of Lumpsum Amount = Amount*(1+Rate)^(Years) [assuming compounding takes annually now]

Using the value calculated above, we get,

Future Value of Lumpsum Amount after 90 Years = 6,956.52*(1+18%)^(90 - 22) = $537,487,705.79

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