Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Related questions
Concept explainers
Question
Transcribed Image Text:You are planning for a very early retirement. You would like to retire at age 40 and have enough money saved to be able to draw $240,000 per year for the next 40 years (based on family history, you think you'll live to age 80). You plan to save for retirement by making 20 equal annual installments (from age 20 to age 40) into a fairly risky
investment fund that you expect will earn 10% per year. You will leave the money in this fund until it is completely depleted when you are 80 years old.
(Click the icon to view the present value annuity table.)
(Click the icon to view the future value annuity table.)
(Click the icon to view the present value table.)
(Click the icon to view the future value table.)
To make your plan work answer the following questions:
i (Click the icon to view the questions.)
1. How much money must you accumulate by retirement? (Hint: Find the present value of the $240,000 withdrawals.)
Calculate the present value to find out how much money must be accumulated by retirement. (Round your answer to the nearest whole dollar.)
The present value is
2. How does this amount compare to the total amount you will draw out of the investment during retirement? How can these numbers be so different?
Over the course of your retirement you will be withdrawing
However, by age 40 you only need to have invested
These numbers are different because:
This is far
More info
▼than the investment's worth at the end of twenty years and remarkably
1. How much money must you accumulate by retirement? (Hint: Find the present value of the $240,000 withdrawals.)
2. How does this amount compare to the total amount you will draw out of the investment during retirement? How can
these numbers be so different?
3. How much must you pay into the investment each year for the first twenty years? (Hint: Your answer from
Requirement 1 becomes the future value of this annuity.)
4. How does the total out-of-pocket savings compare to the investment's value at the end of the 20-year savings period
and the withdrawals you will make during retirement?
O A. You need to have far more accumulated than what you will withdraw because you will withdraw a large portion of the investment every year the balance remains invested where it continues to earn 10% interest.
O B. You need to have far less accumulated than what you will withdraw because you only withdraw a portion of the investment every year the balance remains invested where it continues to earn 10% interest.
You need to have the same accumulated as you will withdraw because you will not earn further interest on your investment when you reach retirement.
O C.
O D. None of the above.
3. How much must you pay into the investment each year for the first twenty years? (Hint: Your answer from Requirement 1 becomes the future value of this annuity.) (Round your answer to the nearest whole dollar.)
For the first twenty years, the amount you must pay into the investment each year is
4. How does the total out-of-pocket savings compare to the investment's value at the end of the 20-year savings period and the withdrawals you will make during retirement? (Use the investment rounded to the nearest whole number that you calculated above, then round your final answer to the nearest whole dollar.)
The total out-of-pocket savings amounts to
Print
than the amount of money you will eventually withdraw from the investment.
Done
Transcribed Image Text:Reference
Present Value of $1
12% 14% 16% 18% 20%
Periods 1%
2% 3% 4%
Period 1 0.990 0.980 0.971 0.962
Period 2
Period 3
Period 4
Period 5
Period 6
Period 7
5% 6% 8% 10%
0.952 0.943 0.926 0.909 0.893 0.877 0.862 0.847 0.833
0.980 0.961 0.943 0.925 0.907 0.890 0.857 0.826 0.797
0.826 0.797 0.769 0.743 0.718 0.694
0.971 0.942 0.915 0.889 0.864 0.840 0.794 0.751 0.712 0.675 0.641 0.609 0.579
0.961 0.924 0.888 0.855 0.823 0.792 0.735 0.683 0.636 0.592 0.552 0.516 0.482
0.951 0.906 0.863 0.822 0.784 0.747 0.681 0.621 0.567 0.519 0.476 0.437 0.402
0.942 0.888 0.837 0.790 0.746 0.705 0.630 0.564 0.507 0.456 0.410 0.370 0.335
0.933 0.871 0.813 0.760 0.711 0.665 0.583 0.513 0.452 0.400 0.354 0.314 0.279
Period 8 0.923 0.853 0.789 0.731 0.677 0.627 0.540 0.467 0.404 0.351 0.305 0.266 0.233
Period 9 0.914 0.837 0.766 0.703 0.645 0.592 0.500
0.703 0.645 0.592 0.500 0.424 0.361 0.308 0.263 0.225 0.194
Period 10 0.905 0.820 0.744 0.676 0.614 0.558 0.463 0.386 0.322 0.270 0.227 0.191 0.162
Period 11 0.896 0.804 0.722 0.650 0.585 0.527 0.429 0.350 0.287 0.237 0.195 0.162 0.135
Period 12 0.887 0.788 0.701 0.625 0.557 0.497 0.397 0.319 0.257 0.208 0.168 0.137 0.112
Period 13 0.879 0.773 0.681
0.681 0.601 0.530 0.469 0.368 0.290 0.229 0.182 0.145 0.116 0.093
Period 14 0.870 0.758 0.661 0.577 0.505 0.442 0.340 0.263 0.205 0.160 0.125 0.099 0.078
Period 15 0.861 0.743 0.642 0.555
0.555 0.481 0.417 0.315 0.239 0.183 0.140 0.108 0.084 0.065
Period 20 0.820 0.673 0.554 0.456 0.377 0.312 0.215 0.149 0.104 0.073 0.051 0.037 0.026
Period 25 0.780 0.610 0.478 0.375 0.295 0.233 0.146 0.092 0.059 0.038 0.024 0.016 0.010
Period 30 0.742 0.552 0.412 0.308 0.231 0.174 0.099 0.057 0.033 0.020 0.012 0.007 0.004
Period 40 0.672
0.142 0.097 0.046 0.022 0.011 0.005 0.003 0.001 0.001
0.453 0.307 0.208
[0
Print
Done
Reference
Future Value of $1
Period 20
Period 25
Period 30
Period 40
4%
5%
6% 8% 10%
Periods 1% 2% 3%
12% 14% 16% 18% 20%
Period 1 1.010 1.020 1.030 1.040 1.050 1.060 1.080 1.100 1.120 1.140 1.160 1.180 1.200
Period 2 1.020 1.040 1.061 1.082 1.103 1.124 1.166 1.210 1.254 1.300 1.346 1.392 1.440
Period 3 1.030 1.061 1.093 1.125 1.158 1.191 1.260 1.331 1.405 1.482 1.561 1.643 1.728
Period 4 1.041 1.082 1.126 1.170 1.216 1.262 1.360 1.464 1.574 1.689 1.811 1.939 2.074
Period 5 1.051 1.104 1.159
1.217 1.276 1.338 1.469 1.611 1.762 1.925 2.100 2.288 2.488
Period 6
1.062 1.126 1.194 1.265 1.340 1.419 1.587
1.772 1.974 2.195
2.436 2.700 2.986
Period 7 1.072 1.149 1.230 1.316 1.407 1.504 1.714 1.949 2.211 2.502 2.826 3.185 3.583
Period 8 1.083 1.172 1.267 1.369 1.477 1.594 1.851 2.144 2.476 2.853 3.278 3.759 4.300
Period 9 1.094 1.195 1.305 1.423 1.551 1.689 1.999 2.358 2.773 3.252 3.803 4.435 5.160
Period 10 1.105 1.219 1.344 1.480 1.629 1.791 2.159 2.594 3.106 3.707 4.411 5.234 6.192
Period 11 1.116 1.243 1.384 1.539 1.710 1.898 2.332 2.853 3.479 4.226 5.117 6.176 7.430
Period 12 1.127 1.268 1.426 1.601 1.796 2.012
2.012 2.518 3.138 3.896 4.818 5.936 7.288 8.916
Period 13 1.138 1.294
1.469 1.665 1.886 2.133
2.133 2.720 3.452 4.363 5.492 6.886 8.599 10.699
Period 14
1.149 1.319
1.513 1.732 1.980 2.261 2.937 3.797 4.887 6.261 7.988
7.988 10.147 12.839
Period 15 1.161 1.346 1.558 1.801 2.079 2.397 3.172 4.177 5.474 7.138 9.266 11.974 15.407
1.220 1.486 1.806 2.191 2.653 3.207 4.661 6.727 9.646 13.743 19.461 27.393 38.338
1.282 1.641 2.094 2.666 3.386 4.292 6.848 10.835 17.000 26.462 40.874 62.669 95.396
1.348 1.811 2.427 3.243 4.322 5.743 10.063 17.449 29.960 50.950 85.850 143.371 237.376
1.489 2.208 3.262 4.801 7.040 10.286 21.725 45.259 93.051 188.884 378.721 750.378 1,469.772
Print
- X
Done
Reference
Present Value of Annuity of $1
Periods 1% 2% 3% 4% 5% 6% 8% 10% 12% 14% 16% 18% 20%
Period 1 0.990 0.980 0.971 0.962 0.952 0.943 0.926 0.909 0.893 0.877 0.862
0.862 0.847 0.833
Period 2 1.970 1.942 1.913 1.886 1.859 1.833 1.783 1.736 1.690 1.647 1.605 1.566 1.528
Period 3 2.941 2.884 2.829 2.775 2.723 2.673 2.577 2.487 2.402 2.322 2.246 2.174 2.106
Period 4 3.902 3.808 3.717 3.630 3.546 3.465 3.312 3.170 3.037 2.914 2.798
2.798 2.690 2.589
Period 5 4.853 4.713 4.580 4.452 4.329 4.212 3.993 3.791 3.605 3.433 3.274 3.127 2.991
Period 6 5.795 5.601 5.417 5.242 5.076 4.917 4.623 4.355 4.111 3.889 3.685 3.498 3.326
Period 7 6.728 6.472 6.230 6.002 5.786 5.582 5.206 4.868 4.564 4.288 4.039 3.812 3.605
Period 8 7.652 7.325 7.020 6.733 6.463 6.210 5.747 5.335 4.968 4.639 4.344 4.078 3.837
Period 9 8.566 8.162 7.786 7.435 7.108 6.802 6.247 5.759 5.328 4.946 4.607 4.303 4.031
Period 10 9.471 8.983 8.530 8.111 7.722 7.360 6.710 6.145 5.650 5.216 4.833 4.494 4.192
Period 11 10.368 9.787 9.253 8.760 8.306 7.887 7.139 6.495 5.938 5.453 5.029 4.656 4.327
Period 12 11.255 10.575 9.954 9.385 8.863 8.384 7.536 6.814 6.194 5.660 5.197
4.793 4.439
Period 13 12.134 11.348 10.635 9.986 9.394 8.853 7.904 7.103 6.424 5.842 5.342 4.910 4.533
Period 14 13.004 12.106 11.296 10.563 9.899 9.295 8.244 7.367 6.628 6.002 5.468 5.008 4.611
Period 15 13.865 12.849 11.938 11.118 10.380 9.712 8.559 7.606 6.811 6.142 5.575
6.142 5.575 5.092 4.675
Period 20 18.046 16.351 14.877 13.590 12.462 11.470 9.818 8.514 7.469 6.623 5.929 5.353 4.870
Period 25 22.023 19.523 17.413 15.622 14.094 12.783 10.675 9.077 7.843 6.873 6.097 5.467 4.948
Period 30 25.808 22.396 19.600 17.292 15.372 13.765 11.258 9.427 8.055 7.003 6.177 5.517 4.979
Period 40 32.835 27.355 23.115 19.793 17.159 15.046 11.925 9.779 8.244 7.105 6.233 5.548 4.997
Print
Done
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by stepSolved in 2 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- - Once answered correctly will UPVOTE!!arrow_forwardYour favorite uncle wants to give each of his favorite nieces and nephews $30,000 now while he is still alive so he can appreciate the benefit of the gratitude. Your goal is to save the money he gives you so when you get older you'll have money to start a business. What will be the value of your investment if the rate you can earn on your investment is 10% compounded semi annually for 7 years?arrow_forwardExcel Master It! Problem This is a classic retirement problem. A friend is celebrating her birthday and wants to start saving for her anticipated retirement. She has the following years to retirement and retirement spending goals: Years until retirement: 30 Amount to withdraw each year: $90,000 Years to withdraw in retirement: 20 Interest rate: 8% Because your friend is planning ahead, the first withdrawal will not take place until one year after she retires. She wants to make equal annual deposits into her account for her retirement fund. If she starts making these deposits in one year and makes her last deposit on the day she retires, what amount must she deposit annually to be able to make the desired withdrawals at retirement? Suppose your friend just inherited a large sum of money. Rather than making equal annual payments, she decided to make one lump-sum deposit today to cover her retirement needs. What amount does she have to deposit today? Suppose…arrow_forward
- Creating a retirement fund Personal Finance Problem To supplement your retirement, you estimate that you need to accumulate $320,000 exactly 39 years from today. You plan to make equal, end-of-year deposits into an account paying 7% annual interest. a. How large must the annual deposits be to create the $320,000 fund by the end of 39 years? b. If you can afford to deposit only $1,300 per year into the account, how much will you have accumulated in 39 years? a. The annual deposits to create the $320,000 fund by the end of 39 years should be $. (Round to the nearest cent.)arrow_forwardDonna wants to create a scholarship fund by saving for several years before the fund starts making annual scholarship payments forever. She plans to save $222,000.00 per year for 6 years. Her first savings contribution is expected in 1 year. What is the expected amount of the scholarship payment that the fund will make in 7 years if the fund is expected to have a return of 7.86 percent per year, make annual scholarship payments that grow annually by 2.34 percent forever, and make its first scholarship payment in 7 years? O $71,691.25 (plus or minus 10 dollars) $89,580.58 (plus or minus 10 dollars) $96,621.62 (plus or minus 10 dollars) $77,326.18 (plus or minus 10 dollars) Onone of the answers are within 10 dollars of the correct answer 0000arrow_forwardUse the savings plan formula to answer the following question. Your goal is to create a college fund for your child. Suppose you find a fund that offers an APR of 5%. How much should you deposit monthly to accumulate $88,000 in 12 years? You should invest $ each month. (Do not round until the final answer. Then round to two decimal places as needed.)arrow_forward
- Use the savings plan formula to answer the following question. Your goal is to create a college fund for your child. Suppose you find a fund that offers an APR of 4%. How much should you deposit monthly to accumulate $87,000 in 15 years? You should invest $ each month. (Do not round until the final answer. Then round to two decimal places as needed.)arrow_forwardAnn and Tom want to establish a fund for their grandson's college education. What lump sum must they deposit at a 10% annual interest rate, compounded quarterly, in order to have $30,000 in the fund at the end of 10 years? Question content area bottom Part 1 They should deposit $enter your response here. (Round up to the nearest cent.)arrow_forwardShelly Franks is planning for her retirement, so she is setting up a payout annuity with her bank. She is now 25 years old, and she will retire when she is 65. She wants to receive annual payouts for twenty years, and she wants those payouts to receive an annual COLA of 2.8%. (a) She wants her first payout to have the same purchasing power as does $14000 today. How big should that payout be if she assumes inflation of 2.8% per year? (b) How much money must she deposit when she is 65 if her money earns 8.1% interest per year? (c) How large a monthly payment must she make if she saves for her payout annuity with an ordinary annuity? (The two annuities pay the same interest rate.) (d) How large a monthly payment would she make if she waits until she is 30 before starting her ordinary annuity?arrow_forward
- Darnell Johnson wants to know if he can retire in 35 years at age 60, when he plans to do a lot of fishing. Assume the deposit into his retirement account averages $3800 at the end of each year and that the funds earn 6% per year. find amount of annuity and the interest earned.arrow_forwardSuppose you have estimated that you will need $2,500 per month in your retirement to meet your expenses and live comfortably, and that you have found or chosen a fund (account) which pays monthly interest 4% APR . What principal, or balance, will your account need to maintain in order to be able to pay you this amount each month? Round/take your answer to the nearest cent.arrow_forwardA recent college graduate hopes to have $200,000 saved in their retirement account 25 years from now by contributing $150 per month in a 401(k) plan. The goal is to earn 10% annually on the monthly contribution. Will they have the $200,000 at the end of the 25 years?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education