Bilbo Baggins wants to save money to meet three objectives. First, he would like
ID: 2818884 • Letter: B
Question
Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with a retirement income of $28,500 per month for 20 years, with the first payment received 30 years and 1 month from now. Second, he would like to purchase a cabin in Rivendell in 10 years at an estimated cost of $365,000. Third, after he passes on at the end of the 20 years of withdrawals, he would like to leave an inheritance of $1,225,000 to his nephew Frodo. He can afford to save $3,000 per month for the next 10 years. If he can earn an EAR of 11 percent before he retires and an EAR of 8 percent after he retires, how much will he have to save each month in Years 11 through 30? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
No. of years before retirement = 30 years
Retirement income = 28500/ month
No. of years after retirement = 20 years
EAR after retires = 8%
The total corpus required at the time of retirement can be calculated by using excel formula, PV(rate,nper,pmt,fv)
After retirement, he would like leave an inheritance 0f 1225000
The present value after 30 years of that corpus will be:
10 years after retirement he would like to purchase a cabin, estimated cost 365000
The present value of that amount will be:
The total corpus required after 30 years = 3407297.31 + 248639.95 + 1644411.06 = 3820378.33
Savings:
after 10 years, the savings can be calculated by using excel formula: FV(rate,nper,pmt,pv)
To accumulate the total corpus, the monthly payment for the next 20 years can be calculated by using excel formula, PMT(rate,nper,pv,fv)
Rate 8% /12 nper 20 * 12 pmt 28500 Future value 0 Present value 3407297.31Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.