Question

You have just made a $6,200 contribution to your individual retirement account. Assume you earn a rate of return of 9.50 percent compounded annually and make no additional contributions. How much more will your account be worth when you retire in 35 years than it would be if you waited another 10 years before making this contribution?

Group of answer choices

$88,610.66

$59,143.85

$148,554.52

$72,171.92

Assume the total cost of a college education will be $170,000 when your baby enters college in 18 years. You presently have $40,000 to invest. What rate of interest must you earn on your investment to cover the cost of your baby's college education?

Group of answer choices

5.56 percent

7.92 percent

6.74 percent

8.37 percent

Answer 1

Answer 1)

Future Value Annuity = 6200 * (1+0.0950)^35

r = 0.0950

n = 35

= 148554.52

If waited 10 years

Future Value Annuity = 6200 * (1+0.0950)^25

r = 0.0950

n = 25

= 59943.85

Diff = 148554.52 - 59943.85 = 88610.66

Answer 2)

Future Value = present Value * (1+r)^n

n = 18

170,000 = 40,000 * (1+r)^18

(1+r)^18 = 170,000 / 40,000

1+r = 4.25^(1/18)

r = 1.0837035502 - 1

r = 8.37%

Option 4 is correct.

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