Question

9.50 Exercises in Compound Interest Study Appendix 9. Then answer the following questions: 1. At age 60, you find that your employer is moving to another location. You receive termination pay of $600,000. You have some savings and wonder whether to retire now. a. If you invest the $600,000 now at 8%, compounded annually, how much money can you withdraw from your account each year so at the end of 5 years there will be a zero balance? b. If you invest the $600,000 now at 10%, compounded annually, how much money can you withdraw from your account each year so at the end of 5 years there will be a zero balance? 16%, compounded annually, which of the following plans is more desirable in terms of present value? Show computations to support your answer, Annual Cash Inflows Year Mining Farming $100,000 80,000 60,000 40,000 20,000 $300,000 $ 20,000 40,000 60,000 80,000 100,000 $300,000

Answer 1

Solution 1a:

Amount to be withdrawn annually = $600,000 / Cumulative PV factor at 8% for 5 periods

= $600,000 / 3.99271 = $150,274

Solution 1b:

Amount to be withdrawn annually = $600,000 / Cumulative PV factor at 10% for 5 periods

= $600,000 / 3.79079 = $158,278

Solution 2:

Computation of Present value
Year	PV factor (16%)	Mining		Farming
		Amount	Present value	Amount	Present value
1	0.86207	$100,000	$86,207	$20,000	$17,241
2	0.74316	$80,000	$59,453	$40,000	$29,727
3	0.64066	$60,000	$38,439	$60,000	$38,439
4	0.55229	$40,000	$22,092	$80,000	$44,183
5	0.47611	$20,000	$9,522	$100,000	$47,611
Total			$215,713		$177,202

Mining plan is more desirable as its having highest present value.