Answer the following two questions as practice. Please show your work.
1) Steve wants to retire in 9 years. He needs an additional $300,000 (today's $) in 9 years to have sufficient funds to finance this objective. He assumes inflation will average 5.0% over the long run, and he can earn a 4.0% compound annual after-tax return on investments. What serial payment should Steve invest at the END of the first year to attain his objective?
Hint: The interest rate is negative because the inflation rate exceeds the return.
a. $34,623.42
b. $34,689.00
c. $36,354.60
d. $36,423.45
e. None of the above
2) What will be Steve's payment at the end of the second year?
a. $38,244.62
b. $38,172.33
c. $36,354.60
d. $34,623.42
e. None of the above
Complete the two problems below. For the second problem, you will need to provide your own objective, using the current inflation rate and current reasonable return given the account being used (please provide documentation for these numbers). Though, ideally, I would like each of you to complete a serial payment calculation based on one of your personal financial goals, this isn't always practical. If it isn't, please do use a fictitious objective.
3) Margaret wants to retire in 9 years. She needs an additional $200,000 in today's dollars in 10 years to have sufficient funds to finance this objective. She assumes inflation will average 5% over the long run, and she can earn a 4% compound annual after-tax return on investments.
What is the future value of the $200,000 that Margaret needs?
What serial payment should Margaret invest at the end of the first year to attain her objective?
What will she need to invest at the end of each year, two through 10?
What is the total of all payments invested?
4) __________________ wants to __________________ (retire, open business, have save for college, etc.) in ___ years. He/She needs an additional $________ in today's dollars in ___ years to have sufficient funds to finance this objective. He/She assumes inflation will average ___ over the long run, and he/she can earn a ___ compound annual after-tax return on investments.
What is the future value that you need?
What serial payment should you invest at the end of the first year to attain your objective?
What will you need to invest at the end of each year?
What is the total of all payments invested?