4.9 - 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

“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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