Question

1.Today is your 25thbirthday and you have a dream of retiring on your 65thbirthday. You want to put aside however much is necessary on your 31stthrough 65thbirthdays (35annual payments) to have enough to retire. You've estimated that you will live until you are 90 and you want the first withdrawal to occur on your 66thbirthday, with the last payment occurring on your 90thbirthday. You think that you will need $175,000 per year to spend during retirement. You estimate constant interest rates of 10.25%. Assuming that you currently have $10,000deposited in your retirement account, how much must you put aside each year in order to have sufficient money to retire at age 65?

2. Daigo Dojimarecently invested $5,500 in a project that is promising to return 2.25 percent per year. The cash flows are expected to be as follow:

END OF YEAR CASH FLOW    1 $1000 2 950 3 875 4 ? 5 850   

Note that the 4th year cash flow is unknown. Assuming the present value of this cash flow stream is $7,500(that is, CF0 = -7500), what is the missing cash flow value (that is, what is the cash flow at the end of the 4thyear)?

3. If Lisa Hamilton wants to fund a scholarship that would pay $12,500 per year forever at GSU, how much would Lisa have to deposit today if she wanted the scholarship to start paying six(6) years from today? Assume the endowment could earn 6.25%p.a. interest forever.

Answer 1

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