Question

An investment will pay you $5,000 two years from today and another $5,000 six years from today. If you require a 9% annual rate of return the investment, how much is the investment worth to you today?

a. $6,954.60

b. $7,189.74

c. $7,974.78

d. $7,698.90

e. $7,437.54

You plan to retire 30 years from today. You wish to have enough in your retirement account to provide you with $50,000 at the end of each year for 20 years after you retire. How much must you place in the account today? Use an interest rate of 7%.

a. $99,851.47

b. $209,507.57

c. $69,585.26

d. $306,466.13

e. $144,173.72

Answer 1

1.
Worth of investment today = ($5,000 / (1+9%)^2) + ($5,000 / (1+9%)^6)

= $4,208.40 + $2,981.34

= $7,189.74

Worth of investment today = $7,189.74

2.
Calculation of amount at the time of retirement:

Rate = 7%
Nper = 20
PMT = $50,000
FV = 0

Amount at the time of retirement can be calculated by using the following excel formula:
=PV(rate,nper,pmt,fv)
=PV(7%,20,-50000,0)
= $529,700.71

Calculation of amount you need to deposit today:

Rate = 7%
Nper = 30
FV = 529700.71
PMT = 0

Amount you need to deposit today can be calculated by using the following excel formula:
=PV(rate,nper,pmt,fv)
=PV(7%,30,0,-529700.71)
= $69,585.26

Amount you need to deposit today = $69,585.26