Ansel and Harriet were a young, highly educated professional couple both employed by one of the leading resort hotels in the area. They were planning on saving for a new house, which they expected to purchase in seven years. In addition to that financial requirement, they felt that Harriet would quit working at that time to care for their expected family, and that the loss of her income would make them unable to keep up payments on the house without additional cash inflows to supplement Ansel’s income. The couple felt that they needed $1,500 a year in supplemental income beginning in seven years to assist with the house payments, and that they needed this cash inflow for each of the next 30 years. They also wanted to have $50,000 with which to make the down payment on a house in seven years when they planned to buy. As both were working, they had plenty of funds for savings and were wondering how much they should put away at the end of each of the next seven years to be able to make the $50,000 down payment AND have the $1,500 a year cash inflow (annuity). An 11% interest rate applied to their situation.
a. How much must Ansel and Harriet set aside each year for the next 7 years so they will have $50,000 down payment in seven years? Provide all assumptions and calculations.
b. How much must Ansel and Harriet set aside each year for the next 7 years so they will have $1,500 per year additional income for 30 years? Provide all assumptions and calculations. (Hint: There are two parts to this. First determine the PV of $1,500 for 30 years and then determine how much they must set aside for the next seven years so they will have this PV amount).
c. Given the results from “a” and “b” above, how much will Ansel and Harriet need to set aside in total each year for the next 7 years? Provide all assumptions and calculations. This step is easy, don’t make it hard.