James plans to fund his individual retirement account, beginning today, with 20 annual deposits Of 52,000, Which he Will continue for the next 20 years. If he can earn an annual compound rate of 8 percent on his deposits, the amount in the account upon retirement Will be 98845. 84(since it is a retirement plan so, assumed to be annuity due) correct 91,523. 93 – ordinary annuity in this accumulation phase. 2. SOCIO is received at the beginning of year 1, $200 is received at the beginning of year 2, and $300 is received at the beginning of year 3.

If these cash flows re deposited at 12 percent, their combined future value at the end of year 3 is 727. 37 3. Marl borrows SO,SOC at 12 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year payment is 1481_as 4. A beach house in southern California now costs $350,000. Inflation is expected to cause this price to increase at S percent per year over the next 20 years before Louis and Kate retire from successful careers in commercial art.

How large an equal annual end-of-year deposit must be made into an account paying n annual rate of interest of 13 percent in order to buy the beach house upon retirement? Value of house on ret. A-1 1 ,472. C S. Chris is planning for her son’s college education to begin five years from today. She estimates the yearly tuition, books, and living expenses to be $5,000 per year for a four-year degree. How much must Chris deposit today, at an interest rate of 8 percent, for her son to be able to withdraw $5,000 per year for four years of college?

First we need to calculate the IV Of a 4 years annuity With an annual payment Of $5,000 at = $16,560. 0 This is the value that should be in Thelma account 5 years from now, now we need to calculate the IV of this amount which would equal the amount Thelma must deposit today: = sys 270. 90 12172. 91 6. Entertainer’s Aid plans five annual colossal concerts, each in a different nation’s capital. The concerts will raise funds for an endowment which would provide the World Wide Hunger Fund with per year into The endowment will be given at the end of the fifth year.

The rate of interest is expected to be g percent in all future periods. HOW much must Entertainer’s Aid opposite each year to accumulate to the required amount? 7. A wealthy art collector has decided to endow her favorite art museum by establishing funds for an endowment which would provide the museum with per year for acquisitions into perpetuity. The art collector will give the endowment upon her fiftieth birthday 10 years from today. She plans to accumulate the endowment by making annual end-of-year deposits into an account. The rate of interest is expected to be 6 percent in all future periods.

**How much must the art collector deposit each year to accumulate to the required amount? **

SOLUTIONS TO SAMPLE TV QUESTIONS DISCUSSED IN THE CLASS

Q 1. If the effective annual rate of interest is known to be 16. 08% on a debt that has quarterly payments, what is the annual percentage rate (aka nominal annual rate)? (Time/Marks 3) My Answer: 15. 1923%

Q 2, If 0. 15, find equivalent nominal interest rate convertible semi-annually, Mans. 15. 3781243% Q 2. Mr.. Aragua deposits RSI. L . 000/- in a bank for 20 years at p. A. Compounded annually. What will the deposit grow to after 20 years? If the inflation rate is 6% p. . , what will be the value of the deposit after 20 years in arms Of the constant rupees (i. E. , real rupees)? (Time/Marks 3)

ANSWER: AVIVA= RSI. 6,727/50=Nominal Value/Cash flow; (AVIVA )Real Value/Constant Rupees = Nominal Cash flow/(l Rate)t (Or) Real Into. Rate = (1. 10/1. 06)-1 =1. 037735849, Value of deposit after 20 yr. In terms of real rupees or constant rupees = Ersatzes. Q 4. A beach house in Purr now costs Inflation is expected to cause this price to increase at 5 percent per year over the next 20 years before Luck and Kosher retire from successful careers in commercial art.

How large n equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the beach house upon retirement? (Time/Marks 3) ANSWER: Value of the house at retirement = FIVE = Annual saving – Annuity ordinary – RSI. 1, 14, 723. 97. Q 5. An oil well presently produces 50,000 barrels per year. It will last for 15 years more, but the production will fall by p. A. Oil prices are expected to increase by 3% p. A. Currently the price of oil is $50 per barrel. What is the present value of the well’s production if the discount rate is pea, effective.