Question

10. You are 29 years old and decide to start saving on your retirement. You plan to save $6,000 at the end of each year (so the first deposit will be one year from now) and make the last deposit when you retire at age 65. Suppose you earn 6% per year on your retirement savings. How much will you have saved for retirement at the age of 65?

11. A rich relative has bequeathed you with a growing perpetuity. The first payment will occur in one year and will be $6816 each. Each year after that, you will receive a payment on the anniversary of the last payment that is 2.5% larger than the last payment. This pattern of payments will go on forever. If the interest rate is 7% per year, what is the present value of the bequest?

Answer 1

10.Information provided:

Annual saving= $6,000

Time= 65 years - 29 year = 36 years

Interest rate= 6%

The question is solved by calculating the future value of ordinary annuity.

Enter the below in a financial calculator to compute the future value of ordinary annuity:

PMT= -6,000

N= 36

I/Y= 6

Press the CPT key and FV to compute the future value of ordinary annuity.

The value obtained is 714,725.20.

Therefore, the amount in the account on the day I retire will be is $714,725.20.

11.Information provided:

Payment= $6,816

Growth rate= 2.5%

Interest rate= 7%

Present value of the bequest is calculated using the below formula:

Present value= Payment after 1 year/ (Interest rate - Growth rate)

= $6,816/ 0.07 - 0.0250

= $6,816/ 0.0450

= $151,466.67.

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