Week 3 Individual Assignment Fin/419 - Finance for Decision Making
Week 3 Individual Assignments Finance for Decision Making FIN/419 January 30, 2012
Chapter 4: Problem 4-23 – Personal Finance Problem
Funding your retirement - You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive $20,000 at the end of each year for the 30 years between retirement and death (a psychic told you would die exactly 30 years after you retire). You know that you will be able to earn 11% per year during the 30-year retirement period.
a. How large a fund will you need when you retire in 20 years to provide the 30-year, $20,000 retirement annuity?
$173,880 will be required to retire in 20 years to provide the 30-year, $20,000 retirement annuity. Calculated as follows:
According to Gitman (2009), present value (annuity): = (, )
PVA = PMT x (PVIFA11%, 30)
PVA = $20,000 x (8.694)
PVA = $173,880 b. How much will you need today as a single amount to provide the fund calculated in part “a” if you earn only 9% per year during the 20 years preceding retirement?
$30,950.64 would be needed today to provide $173,880 assuming only 9% is earned per year during the 20 years preceding retirement.
According to Gitman (2009), present value (single amount): = (, )
PV = FV x (PVIF9%,20)
PV = $173,880 x (0.178) c. What effect would an increase in the rate you can earn both during and prior to retirement have on the values found in parts “a” and “b”? Explain.
The effect an increase in the rate you can earn both during and prior to retirement would decrease the values in parts a and b. A smaller amount would be required in 20 years, and a smaller amount would need to be saved.
Chapter 4: Problem 4-32 – Personal Finance Problem
Funding budget shortfalls - As part of your personal budgeting process, you have determined that in each of the next 5 years you will have budget shortfalls. In other words, you
Chapter 4: Problem 4-23 – Personal Finance Problem
Funding your retirement - You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive $20,000 at the end of each year for the 30 years between retirement and death (a psychic told you would die exactly 30 years after you retire). You know that you will be able to earn 11% per year during the 30-year retirement period.
a. How large a fund will you need when you retire in 20 years to provide the 30-year, $20,000 retirement annuity?
$173,880 will be required to retire in 20 years to provide the 30-year, $20,000 retirement annuity. Calculated as follows:
According to Gitman (2009), present value (annuity): = (, )
PVA = PMT x (PVIFA11%, 30)
PVA = $20,000 x (8.694)
PVA = $173,880 b. How much will you need today as a single amount to provide the fund calculated in part “a” if you earn only 9% per year during the 20 years preceding retirement?
$30,950.64 would be needed today to provide $173,880 assuming only 9% is earned per year during the 20 years preceding retirement.
According to Gitman (2009), present value (single amount): = (, )
PV = FV x (PVIF9%,20)
PV = $173,880 x (0.178) c. What effect would an increase in the rate you can earn both during and prior to retirement have on the values found in parts “a” and “b”? Explain.
The effect an increase in the rate you can earn both during and prior to retirement would decrease the values in parts a and b. A smaller amount would be required in 20 years, and a smaller amount would need to be saved.
Chapter 4: Problem 4-32 – Personal Finance Problem
Funding budget shortfalls - As part of your personal budgeting process, you have determined that in each of the next 5 years you will have budget shortfalls. In other words, you
References: Gitman, L. (2009). Principles of Managerial Finance (12th ed.). New York, NY: Pearson, Addison Wesley.