Finance ch. 5

# Finance ch. 5 - each year forever If your required rate of...

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1. John and Jessica are saving for their child's education. Their daughter is currently eight years old and will be entering college 10 years from now (t = 10). College costs are currently \$15,000 a year and are expected to increase at a rate of 5% a year. They expect their daughter to graduate in four years, and that all annual payments will be due at the beginning of each year (t = 10, 11, 12, and 13). Right now, John and Jessica have \$5,000 in their college savings account. Starting today, they plan to contribute \$3,000 a year at the beginning of each of the next five years (t = 0, 1, 2, 3, and 4). Then their plan is to make six equal annual contributions at the end of each of the following six years (t = 5, 6, 7,8, 9, and 10). Their investment account is expected to have an annual return of 12%. How large of an annual payment do they have to make in the subsequent six years (t = 5, 6, 7, 8, 9, and 10) in order to meet their child's anticipated college costs? A) \$2,925 B) \$8,015 C) \$7,643 D) \$4,411 E) \$6,798 Points Earned: 5.0/5.0 Correct Answer(s): D 2. You are willing to pay \$15,625 to purchase a perpetuity that will pay you and your heirs \$1,250

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Unformatted text preview: each year, forever. If your required rate of return does not change, how much would you be willing to pay if this were a 20-year annual payment, ordinary annuity instead of a perpetuity? A) \$13,922 B) \$10,342 C) \$17,157 D) \$12,273 E) \$11,931 Points Earned: 5.0/5.0 Correct Answer(s): D 3. Bill and Bob are both 25 years old today. Each wants to begin saving for his retirement. Both plan on contributing a fixed amount each year into brokerage accounts that have annual returns of 12%. Both plan on retiring at age 65, 40 years from today, and both want to have \$3 million saved by age 65. The only difference is that Bill wants to begin saving today, whereas Bob wants to begin saving one year from today. In other words, Bill plans to make 41 total contributions (t = 0, 1, 2, . .. 40), while Bob plans to make 40 total contributions (t = 1, 2, . .. 40). How much more than Bill will Bob need to save each year in order to accumulate the same amount as Bill does by age 65? A) \$473.85 B) \$414.48 C) \$796.77 D) \$423.09 E) \$892.39 Points Earned: 5.0/5.0 Correct Answer(s): D...
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Finance ch. 5 - each year forever If your required rate of...

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