Question

# You are planning to retire in 17 years and figure you will need \$2 million in...

You are planning to retire in 17 years and figure you will need \$2 million in your 401K. Your current balance is \$300,000 and you plan to make 17 annual contributions of equal size over the next 17 years beginning one year from today. How much does the size of your payment need to be to meet your goals if you expect your 401K to earn 7% per year?

a. \$29,001.42

b. \$39,958.00

c. None of the above

d. \$34,122.83

Which of the following statements is CORRECT?

a. One defect of the IRR method is that it does not take account of the time value of money.

b. One defect of the IRR method is that it does not take account of cash flows over a project’s full life.

c. One defect of the IRR method is that it does not take account of the cost of capital.

d. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

e. One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.

1.
FV = \$2,000,000
PV = \$300,000
Nper = 17
Rate = 7%

Amount of annual contribution can be calculated by using the following excel formula:
=PMT(rate,nper,pv,fv)
=PMT(7%,17,-300000,2000000)
= \$34,122.83

Amount of annual contribution = \$34,122.83

2.
One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

IRR is the rate at which NPV is zero. The correct answer is option D. Other given options are wrong.

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