Question

9. The time value of money

Consider the following scenarios:

Simon Family

The Simons have saved $5,000 towards their goal to have $45,000 for a down payment on a house in 6 years.

They will put the $5,000 in an account along with money they will deposit annually. They don’t know how much that annual deposit should be, so they’ve asked you to calculate it

They have found a savings institution that will pay 6% interest.

Perkette Family

The Perkettes have set a goal to have $45,000 for a down payment on a house in 6 years.

They have not saved anything so far.

They have asked you to calculate how much they will need to put away each year to achieve their $45,000 down-payment goal.

They have found a savings institution that will pay 6% interest.

Use the scenarios along with the following factor table data to answer each of the questions. Note that the complete Future Value and Future Value Annuity tables (as well as the Present Value and Present Value Annuity tables) are located in the appendix in your text.

Table of Future Value Factors:

Interest Rate
Year	5%	6%	8%
1	1.050	1.060	1.080
2	1.102	1.120	1.166
3	1.158	1.190	1.260
4	1.216	1.260	1.360
5	1.276	1.340	1.469
6	1.340	1.420	1.587
8	1.477	1.590	1.851
10	1.629	1.790	2.159

Table of Future Value Annuity Factors:

Interest Rate
Year	5%	6%	8%
1	1.000	1.000	1.000
2	2.050	2.060	2.080
3	3.152	3.180	3.246
4	4.310	4.380	4.506
5	5.526	5.630	5.867
6	6.802	6.970	7.336
8	9.549	9.890	10.637
10	12.578	13.180	14.487

What is the amount of money the Simons will need to deposit annually (rounded to the nearest two decimal places) to achieve their down-payment goal?

What is the amount of money the Perkettes will need to deposit annually (rounded to the nearest two decimal places) to achieve their down-payment goal?

Answer 1

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