# 4.9 - ON A TIME LINE ❚ ANNUAL INCOME OF \$20,000 ❙...

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“COMPLEX” TIME VALUE OF MONEY PROBLEM In 14 years Jack would like to have enough money to  provide him with an annual income of \$20,000 for 8  years. Jack has saved \$5,000 per year for the past 6 years. If all sums have been or will be at 7%, how much should  Jack save each year for the next 14 years to meet his  goal? Assume all payments are made at the end of the year.

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1. ESTABLISH WHETHER PV OR FV CALCULATION FV (FUTURE VALUE): as the  question asks  “ Jack would like to  have enough money to him with an  annual income ”
2. IDENTIFY CASH FLOW INVOLVED IN THE SITUATION ANNUAL INCOME OF \$20,000 SAVED \$5,000 FOR PAST 6 YRS WILL HAVE TO SAVE FOR NEXT  14 YEARS

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3. ESTABLISH WHETHER LUMP SUM OR ANNUITY ANNUAL INCOME OF \$20,000 ANNUITY SAVED \$5,000 FOR PAST 6 YRS ANNUITY WILL HAVE TO SAVE FOR NEXT  14 YEARS ANNUITY
4. FOR EACH CASH FLOW WRITE DOWN

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Unformatted text preview: ON A TIME LINE ❚ ANNUAL INCOME OF \$20,000 ❙ ANNUITY (n = 8 yrs, i = 7%) ❚ SAVED \$5,000 FOR PAST 6 YRS ❙ ANNUITY (n = 6 yrs, i = 7%) ❚ WILL HAVE TO SAVE FOR NEXT 14 YEARS ❙ ANNUITY (n = 14 yrs, i = 7%) ❚ PROF WRITE OUT TIME LINE 5. CALCULATE ANSWER ❚ PV OF ANNUAL INCOME REQ’T (n = 8 yrs, i = 7%) ❙ \$20,000 X 5.971 = \$119,420 ❚ VALUE TODAY OF PAST SAVINGS (n = 6 yrs, i = 7%) ❙ \$5,000 X 7.153 = \$35,765 ❚ FV OF SAVINGS (n = 14 yrs, i = 7%) ❙ \$35,765 X 2,579 = \$92,238 ❚ SAVINGS SHORTFALL (in year 14) ❙ \$119,420 - \$92,238 = \$27,182 2. IDENTIFY CASH FLOW INVOLVED IN THE SITUATION ❚ READ PROBLEM & WRITE CASH FLOWS ❚ EXAMPLE: A STOCK PAYS A \$2.50 YEARLY DIVIDEND & EXPECT TO SELL IT FOR \$75.00 IN FIVE YEARS ❚ YEARLY DIVIDEND = \$2.50 ❚ SELL IN 5 YRS = \$75.00...
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## This note was uploaded on 11/13/2011 for the course CIVE 2*** taught by Professor - during the Spring '11 term at Carleton CA.

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4.9 - ON A TIME LINE ❚ ANNUAL INCOME OF \$20,000 ❙...

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