QUESTION 5 From: Principles of Finance with Excel 3rd ed, Benninga and Mofkadi,

Question

QUESTION 5 From: Principles of Finance with Excel 3rd ed, Benninga and Mofkadi, ® 2018, 2011, 2006 Mary has just completed her undergraduate degree from Northwestern University ad is already planning to enter an MBA program 4 years from today. The MBA tuition will be $50,000 per year for 2 years, paid at the beginning of each year. In addition, Mary would like to retire 15 years from today and receive a pension of $60,000 every year for 20 years with the first pension payment paid out 15 years from today. Mary can borrow and lend as much as she likes at a rate of 7%, compounded annually. In order to fund her expenditures, Mary will save money.at the end of years 0-3 and at the end of years 6 through 14. Calculate the constant annual dollar amount that Mary must save at the end of each of these years to cover all her expenditures (tuition and retirement). Hint: Build a C.F. IAmort. Table and It will be helpful to use either GoalSeek or Solver Borrow/Lend Rate Annual Savings Tuition/Yr Pension/Yr 50,000.00 60,000.00

Explanation / Answer

PV of tuition fees=-PV(7%,2,50000,0,1)=$96,728.97

PV of pension=PV(7%,15,0,PV(7%,20,60000,1),0)=$230,385.59

Let x be the payment required

PV of payments

=PV(7%,6,0,PV(7%,9,x))+x-PV(7%,3,x)

This must be equal to $230,385.59+$96,728.97=$327,114.56

Hence,

PV(7%,6,0,PV(7%,9,x))+x-PV(7%,3,x)=$327,114.56

=>x=41065.4378138164

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