1.
Richard e-mailed me that he and Monica differed about the impact of his extra spending over the past 15 years. He calculated it at about $3,000 a year. He said the total cost of $45,000 was well within his capability to make up. Monica said the cost was much higher and asked that they compute it. They had been offered an investment of $20,000 that would pay $70,000 in 20 years. They want to know if they should take it. Finally, Richard could sign up for an annuity at work. It would cost $100,000 at age 65 and provide payments of $8,000 per year over his expected 17-year life span. He wants to know if it is attractive. The appropriate market rate of return on investments is 7 percent after tax.
Calculate what the $3,000-per-year deficit, had it been invested, would have amounted to at the end of the 15-year period.
2. Calculate the return on the proposed $20,000 investment and indicate the factors entering into your recommendation to accept or reject it.
Choose TRUE if you accept it
Choose FALSE if you reject it.
1:
Value of $3000 after 15 years = A*((1+r)^n-1) /r
=3000*(1.07^15-1)/0.07
=75387.07
2: Value of $20,000 in 20 years at 7% rate
FV= PV*(1+r)^n
= 20000*1.07^20
=77393.69
However they are getting only 70,000 hence it should not be taken.
Choose False
3: FV of annuity = A*((1+r)^n-1) /r
=8000*(1.07^17-1)/0.07
=246721.7
However he is getting only 100,000. Hence it should not be taken.
1. Richard e-mailed me that he and Monica differed about the impact of his extra spending...
Richard e-mailed me that he and Monica differed about the impact of his extra spending over the past 15 years. He calculated it at about $3,000 a year. He said the total cost of $45,000 was well within his capability to make up. Monica said the cost was much higher and asked that they compute it. They had been offered an investment of $20,000 that would pay $70,000 in 20 years. They want to know if they should take it....
Richard e-mailed me that he and Monica differed about the impact of his extra spending over the past 15 years. He calculated it at about $3,000 a year. He said the total cost of $45,000 was well within his capability to make up. Monica said the cost was much higher and asked that they compute it. They had been offered an investment of $20,000 that would pay $70,000 in 20 years. They want to know if they should take it....
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