4.9 - ON A TIME LINE ANNUAL INCOME OF $20,000 ANNUITY (n =...

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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 ”
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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
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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 REQT (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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4.9 - ON A TIME LINE ANNUAL INCOME OF $20,000 ANNUITY (n =...

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