Question

Newman Weatherspoon, a super salesman contemplating retirement on his fifty-fifth birthday, decides to create a fund on an 12% basis that will enable him to withdraw $21,880 per year on June 30, beginning in 2021 and continuing through 2024. To develop this fund, Newman intends to make equal contributions on June 30 of each of the years 2017–2020.

How much must the balance of the fund equal on June 30, 2020, in order for Newman to satisfy his objective? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

What are each of Newman’s contributions to the fund? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Answer 1

Solution:

Required fund balance on June 30, 2020 = Present value of annual withdrawls

= $21,880 * cumulative PV Factor at 12% for 4 periods

= $21,880 * 3.03735 = $66,457

Required equal contribution from 2017 to 2020 = $66,457 / Cumulative FV factor at 12% for 4 periods

= $66,457 / 4.77933 = $13,905