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- Robert Hitchcock is 40 years old today and he wishes to accumulate $500,000 by his sixty-fifth birthday so he can retire to his summer place on Lake Hopatcong. He wishes to accumulate this amount by making equal deposits on his fortieth through his sixty-fourth birthdays. What annual deposit must Robert make if the fund will earn 12% interest compounded annually?
- Diane Ross has $20,000 to invest today at 9% to pay a debt of $47,347. How many years will it take her to accumulate enough to liquidate the debt?
- Cindy Houston has a $27,600 debt that she wishes to repay 4 years from today; she has $19,553 that she intends to invest for the 4 years. What rate of interest will she need to earn annually in order to accumulate enough to pay the debt?
- Julia Baker died, leaving her husband Brent an insurance policy contract that provides that the beneficiary can choose any one of the following four options.
a) $55,000 immediate cash
b) $4,000 every 3 months payable at the end of each quarter for 5 years.
c) $18,000 immediate cash and $1,800 every 3 months for 10 years, payable at the beginning of each 3-month period.
d) $4,000 every 3 months for 3 years and $1,500 each quarter for the following 25 quarters, all payments payable at the end of each quarter.
Instructions:
If money is worth 2 ½% per quarter, compounded quarterly, which option would you recommend that Brent exercises?
Sample Solution
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