Finance Individual Asst. Week 3

# Finance Individual Asst. Week 3 - Finance Week 3 Individual...

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Finance Week 3 Individual Assignment E-text Exercises P4–23 Funding your retirement You plan to retire in exactly 20 years. Your goal is to create  a fund that will allow you to receive \$20,000 at the end of each year for the 30 years between  retirement and death (a psychic told you would die exactly 30 years after you retire). You know that  you will be able to earn 11% per year during the 30-year retirement period. a. How large a fund will you need when you retire in 20 years to provide the 30-year, \$20,000 retirement annuity? b. How much will you need today as a single amount to provide the fund calculated in part  a if you  earn only 9% per year during the 20 years preceding retirement? c. What effect would an increase in the rate you can earn both during and prior to retirement have on  the values found in parts  a and  b? Explain. a) This is a present value of annuities problem. The formula for PV of annuity: PV = [C/i] * [1-1/{(1+i)^n}] Where C = annuity payments i = interest n = payment periods. PV = [\$20,000/.11] * [1-1/{(1+.11)^30}] PV = \$173,875.85 b. This will be a present value of principle problem. The formula for PV of principle: PV = P / [(1+i)^n] Where P is the amount you want after n years at i interest PV = \$173,875.85 / [(1+.09)^20] PV = \$31,024.82 c. If the interest in part a. went from .11 to .20, you'd need only \$99,578.73. Likewise, in  part b., if the .09 went to, say .15 and the interest from part a. remained at .11, you'd only  need \$10,623.86. This is because higher compounding interest rates will generate more money, meaning less

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## This note was uploaded on 11/13/2010 for the course FINANCE FIN/370 taught by Professor Gabrielrenero during the Fall '10 term at University of Phoenix.

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Finance Individual Asst. Week 3 - Finance Week 3 Individual...

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