Question

1. Compute the amount that a $42,000 investment today would accumulate at 11% (compound interest) by the end of 6 years. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

2. Daniel wants to retire at the end of this year (2020). His life expectancy is 20 years from his retirement. Daniel has come to you, his CPA, to learn how much he should deposit on December 31, 2020 to be able to withdraw $70,000 at the end of each year for the next 20 years, assuming the amount on deposit will earn 8% interest annually. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

3.Nancy Thomas has a $2,800 overdue debt for medical books and supplies at Joe's Bookstore. She has only $900 in her checking account and doesn't want her parents to know about this debt. Joe's tells her that she may settle the account in one of two ways since she can't pay it all now:

1. Pay $900 now and $2,200 when she completes her residency, 2 years from today.

2. Pay $3,700 one year after completion of residency, 3 years from today.

Assuming that the cost of money is the only factor in Nancy's decision and that the cost of money to her is 6%, which alternative should she choose? (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 458,581.)

Answer 1

1.

Investment Amount	FV Factor	Future Value
	(1 + 11%)^6
$                   42,000.00	1.87041	$          78,557

2.

For this we need to calculate the present value of $ 70,000 each year for 20 years

Year	Amount	PV Factor	Present Value
		1 / (1+8%)^Year
1	$         70,000	0.92593	$            64,815
2	$         70,000	0.85734	$            60,014
3	$         70,000	0.79383	$            55,568
4	$         70,000	0.73503	$            51,452
5	$         70,000	0.68058	$            47,641
6	$         70,000	0.63017	$            44,112
7	$         70,000	0.58349	$            40,844
8	$         70,000	0.54027	$            37,819
9	$         70,000	0.50025	$            35,017
10	$         70,000	0.46319	$            32,424
11	$         70,000	0.42888	$            30,022
12	$         70,000	0.39711	$            27,798
13	$         70,000	0.36770	$            25,739
14	$         70,000	0.34046	$            23,832
15	$         70,000	0.31524	$            22,067
16	$         70,000	0.29189	$            20,432
17	$         70,000	0.27027	$            18,919
18	$         70,000	0.25025	$            17,517
19	$         70,000	0.23171	$            16,220
20	$         70,000	0.21455	$            15,018
			$          687,270

3.

Option 1 PV

Investment Amount	PV Factor	Present Value
	1/ (1 + 6%)^2
$                         900.00	1.00000	$                  900
$                     2,200.00	0.89000	$               1,958
		$               2,858

Option 2 PV

Investment Amount	PV Factor	Present Value
	1/(1 + 6%)^3
$                     3,700.00	0.83962	$               3,107
		$               3,107

Option 1 is better