Problem 1

Analysis for Question A

Point 1: The problems asks us to find the value of money (today) that we need to save today, so that under a 10% interest rate

Point 2: We are only ask the value of the savings today, a single amount of money, not an annuity, therefore we are going to u

Point 3: In order to solve this we will have to first the Future Value of $1 Factor, because it is the amount that needs to be the

Given:

Future Value 500000

Term (Years) 10
Discount Rate 10%

Formula:

Present Value (Savings right now) = Future Value / ((1+Discount Rate)^Term)

Present Value (Savings right now) = 500,000 / ((1+10%)^10)
Present Value (Savings right now) = 192,771.64 Rounded to nearest cent

Analysis for Question B

Point 1: The problems asks us to find the value of the money we have to save every end of the year, so that under a 10% inter

Point 2: We are only ask the value of the annual savings, a mulitple flow of money, an annuity, therefore we are going to use th

Point 3: In order to solve this we will have to first the Future Value of Annuity Factor, because it is the amount that needs to be

Given:

Future Value 500000

Term (Years) 10
Discount Rate 10%

Formula:

Present Value (Annual Savings) = Future Value / ((((1+Discount Rate)^Term)-1)/Discount Rate)

Present Value (Annual Savings) = 500,000 / ((((1+10%)^10)-1)/10%)
Present Value (Annual Savings) = 500,000 / 15.9374
Present Value (Annual Savings) = 31,372.70 Rounded to nearest cent
o that under a 10% interest rate it will reach 500,000 in ten years time

ity, therefore we are going to use the Future Value Factor of $1 or in the chapter "FV of Simple Cash Flow"

e amount that needs to be the denominator in this formula Savings = Future Value / Future Value of $1 Factor

year, so that under a 10% interest rate all of it will reach 500,000 in total, in 10 years time.

therefore we are going to use the Future value of Annuity

t is the amount that needs to be the denominator in this formula Savings = Future Value / Future Value of Annuity Factor

scount Rate)
of Annuity Factor
Problem 3

Analysis for Question

Point 1: The problems asks us to find the monthly payment needed to pay off the mortgage

Point 2: Since, the rate presented is in annual rate, we have to convert it to monthly rate by dividing it to 12 (Months in a year)

Point 3: Since, the payment is monthly, the term will be equal to the number of payments which is 30 years * 12 or

Point 4: In oprder to solve this we first need to calculate the Present Value of Annuity, because we have to find the value of the

Point 5: After that we will just divide it to the mortgage amount, because Mortgage formula is Mortgage = Monthly Paymen

Given

Mortgate Amount 200,000

Monthly Rate 0.667%
Number of Payments 360

Monthly Payment = Mortgage Amount / Present Value of Annuity

Monthly Payment = 200,000 / ((1-((1+(Annual Percentage Rate/12))^-(Number of years*12)))/(Annual Percentage Rat
Monthly Payment = 200,000 / ((1-((1+(8%/12))^-(30*12)))/(8%/12))
Monthly Payment = 200,000 / 136.2835
Monthly Payment = 1,467.53 Rounded to nearest cent
viding it to 12 (Months in a year). Therefore the monthly rate is 8%/12 or 0.667%

ch is 30 years * 12 or 360

e we have to find the value of the annuity (Monthly Payment) needed for you to pay off your mortgage in 30 years or 360 payments.

Mortgage = Monthly Payment x PV of Annuity Factor

ars*12)))/(Annual Percentage Rate/12))

years or 360 payments.
Problem 4

Analysis for Question

You want to buy a car worth 20,000 and the dealer wants you to choose between two options. The option that we will take is tc

Point 1: First option Takes 10% off the initial price but adds 9% after a year.

Point 2: Second Option will not give you a discount but will add a 3% after a year

Point 3: We have to analyze each option and find which is cheaper.

Point 4: In order to solve this we will find the estimated monthly payment of each option the same as question 3. Again for Num

Point 5: In oprder to solve this we first need to calculate the Present Value of Annuity, because we have to find the value of the

Point 6: After that we will just divide it to the mortgage amount, because Mortgage formula is Mortgage = Monthly Paymen

Given:

Cost of Car 20,000

Discounted Price at 10% 18,000
Number of Periods Financed (5 years x 60

IMPORTANT NOTICE: According to the answer sheet the car is financed for 5 years total. So I used

Monthly Payment Option 1 = Casr Cost / Present Value of Annuity Factor

Monthly Payment Option 1 = 18,000 / ((1-((1+(Annual Percentage Rate/12))^-(Number of years*12)))/(Annual Perce
Monthly Payment Option 1 = 18,000 / ((1-((1+(9%/12))^-(5*12)))/(9%/12))
Monthly Payment Option 1 = 18,000 / 48.17337
Monthly Payment Option 1 = 373.65 Rounded to nearest cent

Monthly Payment Option 2 = Casr Cost / Present Value of Annuity Factor

Monthly Payment Option 2 = 20,000 / ((1-((1+(Annual Percentage Rate/12))^-(Number of years*12)))/(Annual Perce
Monthly Payment Option 2 = 20,000 / ((1-((1+(3%/12))^-(5*12)))/(3%/12))
Monthly Payment Option 2 = 20,000 / 55.65236
Monthly Payment Option 2 = 359.37 Rounded to nearest cent

Looking at the options, number 2 has the more favorable deal

option that we will take is tcheapest option

as question 3. Again for Number of periods its 5 years x 12 and for monthly rate, its Annual Rate /12

have to find the value of the annuity (Monthly Payment) needed for you to pay off your mortgage in 30 years or 360 payments.

tgage = Monthly Payment x PV of Annuity Factor

r 5 years total. So I used the same assumption

of years*12)))/(Annual Percentage Rate/12))

of years*12)))/(Annual Percentage Rate/12))

or 360 payments.
Problem 7

Analysis for the question

We need to find the maximum amount that your relative is allowed to withraw for him to exhaust all of his savings (250,000) ov

Point 1 = Just like question 3 and 4, let us treat this like we are paying a mortgage amounting 250,000 which will be exhausted

Point 2: In order to solve this we will find the estimated monthly payment of each option the same as question 3. Again for Num

Point 3: In oprder to solve this we first need to calculate the Present Value of Annuity, because we have to find the value of the

Point 4: After that we will just divide it to the Savings Amount.

Given:

Amount of Savings to Exhaust 250,000

Annual Rate 5%
Number of Periods to exhaust 25

FORMULA

Mmaximum amount of withdrawal every year = Total Savings / Present Value of Annuity Factor
Mmaximum amount of withdrawal every year = 250,000 / ((1-((1+Annual Percentage Rate)^-Number of withdrawal)
Mmaximum amount of withdrawal every year = 250,000 / ((1-((1+5%)^-25))/5%)
Mmaximum amount of withdrawal every year = 250,000 / 14.09394
Mmaximum amount of withdrawal every year = 17,738.11 Rounded to nearest cent
ust all of his savings (250,000) over 25 years

250,000 which will be exhausted by paying 25 equal installments

ame as question 3. Again for Number of periods its 1 year x 12 and for monthly rate, its Annual Rate /12

e we have to find the value of the annuity (Annual Withdrawal) needed for you to exhaust its savings to zero

ge Rate)^-Number of withdrawal))/Annual Percentage Rate)

Problem 9

Analysis for Question

A total of 500 billion over 10 years will be reduced on the budget. But the 500 billion will be reduced in pieces. Now we have to

Point 1: This is a basic calculation of PV of Simple Cash Flow. We just have to calculate the present value of each cash flow at d

Point 2: In order to do that, we just have to first, calculate the PV of Simple Cashflows Factor at different time periods

Point 3: Multiply those factors with each year's cash flow and then Total it.

Step 1 - Calculate PV of Simple Cash Flows Factor at each time period

The basic formula will be PV Factor = (1+Rate)^-Year

Year Formula PV Factor

1 (1+8%)^-1 0.925925926
2 (1+8%)^-2 0.85733882
3 (1+8%)^-3 0.793832241
4 (1+8%)^-4 0.735029853
5 (1+8%)^-5 0.680583197
6 (1+8%)^-6 0.630169627
7 (1+8%)^-7 0.583490395
8 (1+8%)^-8 0.540268885
9 (1+8%)^-9 0.500248967
10 (1+8%)^-10 0.463193488

Step 2 - Calculate Each Years PV of Cash Flow

Year PV Factor * Cash Flow =

1 0.925925925925926 * 25,000,000,000 =
2 0.857338820301783 * 30,000,000,000 =
3 0.79383224102017 * 35,000,000,000 =
4 0.735029852796453 * 40,000,000,000 =
5 0.680583197033753 * 45,000,000,000 =
6 0.630169626883105 * 55,000,000,000 =
 7 0.583490395262134 * 60,000,000,000 =
8 0.540268884501976 * 65,000,000,000 =
9 0.500248967131459 * 70,000,000,000 =
10 0.463193488084684 * 75,000,000,000 =

Step 3 - Calculate Total PV of Cash Flows

Year PV of Cash Flow

1 23,148,148,148.15
2 25,720,164,609.05
3 27,784,128,435.71
4 29,401,194,111.86
5 30,626,243,866.52
6 34,659,329,478.57
7 35,009,423,715.73
8 35,117,477,492.63
9 35,017,427,699.20
10 34,739,511,606.35
Total PV of Cash Flows 311,223,049,163.77
n will be reduced in pieces. Now we have to compute how much is the value today of all that pieces of reduction

ate the present value of each cash flow at different time periods.

ws Factor at different time periods

PV of Cash Flow
23,148,148,148.15
25,720,164,609.05
27,784,128,435.71
29,401,194,111.86
30,626,243,866.52
34,659,329,478.57
35,009,423,715.73
35,117,477,492.63
35,017,427,699.20
34,739,511,606.35
Problem 10

Anaylsis for question A

Point 1: The problems asks us to find the value of the money the legislature have to save every end of the year, so that under

Point 2: We are only ask the value of the annual savings, a mulitple flow of money, an annuity, therefore we are going to use th

Point 3: In order to solve this we will have to first the Future Value of Annuity Factor, because it is the amount that needs to be

Given:

Future Value 25,000,000,000

Term (Years) 10
Discount Rate 6%

Formula:

Present Value (Annual Savings) = Future Value / ((((1+Discount Rate)^Term)-1)/Discount Rate)

Present Value (Annual Savings) = 25,000,000 / ((((1+6%)^10)-1)/6%)
Present Value (Annual Savings) = 25,000,000,000 / 13.18079
Present Value (Annual Savings) = 1,896,698.96 Rounded to nearest cent

Anaylsis for question B

Point 1: The problems asks us to find the value of the money the legislature have to save every end of the year, so that under

Point 2: We are only ask the value of the annual savings, a mulitple flow of money, an annuity, therefore we are going to use th

Point 3: In order to solve this we will have to first the Future Value of Annuity Factor, because it is the amount that needs to be

Point 4: We have to calculate the annual savings if 8% is the rate

Point 5: We have to validdate if this will result in a budget savings. By confirming if this is a higher annuity or a lower one

Formula:

Present Value (Annual Savings) = Future Value / ((((1+Discount Rate)^Term)-1)/Discount Rate)

Present Value (Annual Savings) = 25,000,000 / ((((1+8%)^10)-1)/8%)
Present Value (Annual Savings) = 25,000,000,000 / 14,48656
Present Value (Annual Savings) = 1,725,737.22 Rounded to nearest cent
Present Value (Annual Savings) 6% 1,896,698.96
Present Value (Annual Savings) 8% 1,725,737.22
Annual Budget Savings 170,961.74

Since, under 6% we are required to save 170,961.74 higher than under 8%, we could agree with the statement

Note: Yet again this is just an estimate of a possible savings, the real savings can only be realized in actuality.
 of the year, so that under a 6% interest rate all of it will reach 25,000,000,000 in total, in 10 years time.

efore we are going to use the Future value of Annuity

he amount that needs to be the denominator in this formula Savings = Future Value / Future Value of Annuity Factor

14.48656

of the year, so that under a 6% interest rate all of it will reach 25,000,000,000 in total, in 10 years time.

efore we are going to use the Future value of Annuity

he amount that needs to be the denominator in this formula Savings = Future Value / Future Value of Annuity Factor

annuity or a lower one

gree with the statement in the question that it will be a budget savings

e realized in actuality.
Annuity Factor

Annuity Factor
Problem 12

Analysis for Question A

Point 1: The problems asks us to find the monthly payment needed to pay off the mortgage

Point 2: Since, the rate presented is in annual rate, we have to convert it to monthly rate by dividing it to 12 (Months in a year)

Point 3: Since, the payment is monthly, the term will be equal to the number of payments which is 30 years * 12 or

Point 4: In oprder to solve this we first need to calculate the Present Value of Annuity, because we have to find the value of the

Point 5: After that we will just divide it to the mortgage amount, because Mortgage formula is

Point 6: After this we have to annualize the payment and calculate the Total Payments which consist of the Annual Payment +

Given

Cost of House
Less: Downpayment
Mortgate Amount
Monthly Rate
Number of Payments

Step 1 - Calculate Monthly Payments of each House

Monthly Payment Chatham=

Monthly Payment Chatham=
Monthly Payment Chatham=
Monthly Payment Chatham=
Monthly Payment Chatham=

Monthly Payment South Orange =

Monthly Payment South Orange =
Monthly Payment South Orange =
Monthly Payment South Orange =
Monthly Payment South Orange =

Step 2 - Calculate Annual Mortgage Payment

Monthly Payment
Multiply by Months in a year
Annual Mortgage Payment

Step 3 - Calculate Annual Total Payment

Annual Mortgage Payment

Annual Property Tax
Annual Total Payment

Analysis for Question B

We are asked if the mortgage payment and property taxes are directly comparable

Answer:

No.

Mortgage payments and property taxes are related aspects of homeownership, but they serve different purposes and are not di

Mortgage Payment
A mortgage payment is the monthly amount you pay to your lender to
repay the loan you took out to purchase the property.

It typically includes principal and interest. The principal is the amount

borrowed, and the interest is the cost of borrowing.

The total mortgage payment may also include other costs like
homeowners insurance and, in some cases, private mortgage insurance
(PMI).

In relation to the problem, Mortgage Payments are just for 30 years

Analysis for Question C

Poiint 1: Propery tax grows 3% a year for forever. Therefore it increases in perpetuity. We need to calculate its Present Value o

constant rate forever.

Point 3: After this we have to add it with the Price of the house to get the cost of both Houses and then we can compare
Formula

Step 1: Calculate PV of Growing Perpetuity of each houses Property Taxes

PV of Growing Perpetuity for Chatham's Property Tax =

PV of Growing Perpetuity for Chatham's Property Tax =
PV of Growing Perpetuity for Chatham's Property Tax =

PV of Growing Perpetuity for South Orange's Property Tax =

PV of Growing Perpetuity for South Orange's Property Tax =
PV of Growing Perpetuity for South Orange's Property Tax =

Step 2 - Calculate Total Price of the Houses

Price
PV Of Growing Perpetuity
Total Cost of Each Houses

As we can see, Chatham has a lower cost than South Orange

eeded to pay off the mortgage

to convert it to monthly rate by dividing it to 12 (Months in a year). Therefore the monthly rate is 8%/12 or

l to the number of payments which is 30 years * 12 or

Present Value of Annuity, because we have to find the value of the annuity (Monthly Payment) needed for you to pay off your mortgage in

unt, because Mortgage formula is Mortgage = Monthly Payment x PV of Annuity Factor

culate the Total Payments which consist of the Annual Payment + Annual Property Tax

Chatham
400,000
100,000
300,000
0.667%
360

Mortgage Amount / Present Value of Annuity

300,000 / ((1-((1+(Annual Percentage Rate/12))^-(Number of years*12)))/(Annual Percentage Rate/12))
300,000 / ((1-((1+(8%/12))^-(30*12)))/(8%/12))
300,000 / 136.2835
2,201.29

Mortgage Amount / Present Value of Annuity

200,000 / ((1-((1+(Annual Percentage Rate/12))^-(Number of years*12)))/(Annual Percentage Rate/12))
200,000 / ((1-((1+(8%/12))^-(30*12)))/(8%/12))
200,000 / 136.2835
1,467.53
 Chatham
2,201.29
12
26,415.52

Chatham
26,415.52
6,000
32,415.52

e directly comparable

f homeownership, but they serve different purposes and are not directly comparable.

Property Taxes
Property taxes are fees imposed by local governments on property owners. The amount is usually based on the
assessed value of the property.

These taxes are used to fund local services and amenities such as schools, roads, public safety, and other
community services.

Property taxes are typically paid on an annual or semi-annual basis and are not part of your monthly mortgage
payment.

In relation to the problem, Property taxes is paid as long as you have the house.

it increases in perpetuity. We need to calculate its Present Value of Growing Perpetuity

se to get the cost of both Houses and then we can compare

uses Property Taxes

(Property Tax * (1 + Growth Rate))/(Mortgage Rate - Growth Rate)

(6,000 * (1+3%))/(8%-3%)
123,600

(Property Tax * (1 + Growth Rate))/(Mortgage Rate - Growth Rate)

(12,000 * (1+3%))/(8%-3%)
247,200

Chatham
400,000
123,600
523,600
o pay off your mortgage in 30 years or 360 payments.

South Orange
300,000
100,000
200,000
0.667%
360

Rounded to nearest cent

Rounded to nearest cent

South Orange
1,467.53
12
17,610.35

South Orange
17,610.35
12,000
29,610.35
South Orange
300,000
247,200
547,200
Problem 13

Analysis for Question A

Point 1: The problems asks us to find the monthly payment needed to pay off the mortgage

Point 2: Since, the rate presented is in annual rate, we have to convert it to monthly rate by dividing it to 12 (Months in a year)

Point 3: Since, the payment is monthly, the term will be equal to the number of payments which is 30 years * 12 or

Point 4: In oprder to solve this we first need to calculate the Present Value of Annuity, because we have to find the value of the

Point 5: After that we will just divide it to the mortgage amount, because Mortgage formula is Mortgage = Monthly Paymen

Given

Cost of House 250,000

Less: Downpayment 50,000
Mortgate Amount 200,000
Monthly Rate 0.833%
Number of Payments 360

Formula

Monthly Payment Mortgage Amount / Present Value of Annuity

Monthly Payment 200,000 / ((1-((1+(Annual Percentage Rate/12))^-(Nu
Monthly Payment 200,000 / ((1-((1+(10%/12))^-(30*12)))/(10%/12))
Monthly Payment 200,000 / 113.9508
Monthly Payment 1,755.14

Analysis for Question B

Point 1: The problems asks us to find the monthly payment needed to pay off the mortgage

Point 2: Since, the rate presented is in annual rate, we have to convert it to monthly rate by dividing it to 12 (Months in a year)

Point 3: Since, the payment is monthly, the term will be equal to the number of payments which is 30 years * 12 or
Point 4: In oprder to solve this we first need to calculate the Present Value of Annuity, because we have to find the value of the

Point 5: After that we will just divide it to the mortgage amount, because Mortgage formula is Mortgage = Monthly Paymen

Given

Mortgate Amount 200,000.00

Monthly Rate 0.750%
Number of Payments 360

Monthly Payment New Mortgage Amount / Present Value of Annuity

Monthly Payment New 198,888.24 / ((1-((1+(Annual Percentage Rate/12))^-(
Monthly Payment New 198,888.24/ ((1-((1+(9%/12))^-(30*12)))/(9%/12))
Monthly Payment New 198,888.24 / 124.2819
Monthly Payment New 1,609.25

Analysis for Question C

Point 1: A refinancing cost of 3% of the 200,000 mortgage amount is required to refinance

Point 2: We need first to calculate the Present Value of the annual saving using the present value of annuity factor. We need to

Point 3: Then we compare if the benefit from refinancing is higher than the cost of refinancing

Step 1 - Calculate Savings from Refinancing

Monthly Payment 10% 1,755.14

Monthly Payment 9% 1,609.25
Monthly Savings of Refinancing 145.90

Step 2 - Calculate Present Value of the Monthly Savings

PV of Monthly Savings = Monthly Savings of Refinancing * PV Of Annuity Factor

PV of Monthly Savings = Monthly Savings of Refinancing * ((1-((1+(Opportunity
PV of Monthly Savings = 145.90 * ((1-((1+(8%/12))^-(5*12)))/(8%/12))
PV of Monthly Savings = 145.90 * 49.3184333
PV of Monthly Savings = 7,195.56

Step 3 - Calculate Cost of Refinancing

Principal 200,000
Multiply by Rate 3%
Cost of Refinancing 6,000

Step 4 - Determine if you would refinance or not

PV of Monthly Savings 7,195.56

Cost of Refinancing 6,000.00
Net Benefit of Refinancing 1,195.56

Therefore, you should refinance

Analysis for Question D

Point 1 - We are going to prepare a sensitivity analysis wherein we will need to get the minimum interest rate where in refinanc

Step 1 - Calculate the Monthly Payment needed to cover the refinancing cost

Monthly Payment to Cover Refinancing Cost= Refinancing Cost / PV Of Annuity Factor

Monthly Payment to Cover Refinancing Cost= Refinancing Cost / ((1-((1+(Opportunity Cost/12))^-(N
Monthly Payment to Cover Refinancing Cost= 6000 / ((1-((1+(8%/12))^-(5*12)))/(8%/12))
Monthly Payment to Cover Refinancing Cost= 6000 / 49.3184333
Monthly Payment to Cover Refinancing Cost= 121.66

These amount will be the monthly savings wherein Net Benefit of Refinancing is zero "0"

Step 2 - Calculate the Monthly Payment for a 121.66 monthly payment savings

Monthly Payment 10% 1,755.14

Less: Monthly Payment to Cover Refinancing Cost 121.66
Monthly Payment for a 121.66 monthly payment savings 1,633.48

Step 3 - Calculate the Interest Rate Used to get the 1633.48 Monthly Payment and 3121.66 savings

Since there is no clear cut formula to solve the "Rate" we are going to use the Microsoft Excel "Rate" Function

Monthly Rate= 0.76%

Note: This is still a monthly rate, we need to convert it to Annual Rate

Step 4 - Convert Monthly Rate to Annual Rate

Monthly Rate 0.76%

Multiply by 12
Annual Interest Rate 9.17% Final Answer
ividing it to 12 (Months in a year). Therefore the monthly rate is 10%/12 or

ch is 30 years * 12 or

e we have to find the value of the annuity (Monthly Payment) needed for you to pay off your mortgage in 30 years or 360 payments.

Mortgage = Monthly Payment x PV of Annuity Factor

resent Value of Annuity

nnual Percentage Rate/12))^-(Number of years*12)))/(Annual Percentage Rate/12))
0%/12))^-(30*12)))/(10%/12))

ividing it to 12 (Months in a year). Therefore the monthly rate is 9%/12 or

ch is 30 years * 12 or
 e we have to find the value of the annuity (Monthly Payment) needed for you to pay off your mortgage in 30 years or 360 payments.

Mortgage = Monthly Payment x PV of Annuity Factor

resent Value of Annuity

+(Annual Percentage Rate/12))^-(Number of years*12)))/(Annual Percentage Rate/12))
(9%/12))^-(30*12)))/(9%/12))

alue of annuity factor. We need to get the present value because we will compare it with the value today of refinancing

efinancing * PV Of Annuity Factor

efinancing * ((1-((1+(Opportunity Cost/12))^-(Number of Years you stay in the house*12)))/(Opportunity Cost/12))
%/12))^-(5*12)))/(8%/12))

49.31843334
um interest rate where in refinancing is acceptable, meaning the interest rate wherein PV of Refinancing Savings will equal refinancing cost

Of Annuity Factor
1-((1+(Opportunity Cost/12))^-(Number of Years you stay in the house*12)))/(Opportunity Cost/12))
12))^-(5*12)))/(8%/12))

3121.66 savings

osoft Excel "Rate" Function

Final Answer
n 30 years or 360 payments.
n 30 years or 360 payments.

of refinancing

ty Cost/12))
Savings will equal refinancing cost
Problem 14

Analysis for Question A

Point 1: You are 35 years old and you will retire at 65, making it 30 years left to Save

Point 2: From age 66 to 100 you will have 35 years to leave and consume, 30,000 a year

Point 3: First we need to calculate the Present Value of the 30,000 a year that you will consume for 34 years and then;

Point 4: Add the answer in Point 3 to the one time payment of 300,000 youll need to pay at age 66. This the the total future am

Given

Lumpsum amount needed at age 65 300,000

Annuity needed every year for 34 years 30,000
Discount Rate 8%
Term 35

Formula

PV of Annuity of 30,000 for 35 years = Annuity * Present Value of Annuity

PV of Annuity of 30,000 for 35 years = Annuity * ((1-((1+Rate)^-Term))/Rate)
PV of Annuity of 30,000 for 35 years = 30,000 * ((1-((1+8%)^-35))/8%)
PV of Annuity of 30,000 for 35 years = 30,000 * 11.65457
PV of Annuity of 30,000 for 35 years = 349,637.05

PV of Annuity of 30,000 for 34 years 349,637.05

Add: Lump Sum Amount needed at age 65 300,000.00
Total Amount needed at age 65 to retire 649,637.05 Final Answer

Analysis for Question B

Point 1: You need 649,637.05 in 30 years, you already have 50,000. So first we find to need the Future Value of the lump sum
Point 2: From Point 1 we will deduct the result from 649,637.05 to get the amount of money that we still needed to have.

Point 3: From the amount of money that we still needed to have, we will compute the amount of money that needs to be save

Step 1 - Calculate Future Value of Simple Cash Flow of $50,000

Given

Lumpsum Amount 50,000

Discount Rate 8%
Term 30

FV of Simple Cash Flow of $50,000 = Cash Flow * ((1+Rate)^Term)

FV of Simple Cash Flow of $50,000 = 50,000 * ((1+8%)^30)
FV of Simple Cash Flow of $50,000 = 50,000 * 10.06266
FV of Simple Cash Flow of $50,000 = 503,132.84

Step 2 - Calculate the amount of money still needed by age 65

Total Amount needed at age 65 to retire 649,637.05

Less: FV of Simple Cash Flow of $50,000 503,132.84
Amount of money still needed by age 65 146,504.20

Step 3 - Calculate Annual Savings from the amount still needed

Annual Savings = Amount still needed / ((((1+Rate)^Term)-1)/Rate)

Annual Savings = 146,504.20 / ((((1+8%)^30)-1)/8%)
Annual Savings = 146,504.20 / 113.2832
Annual Savings = 1,293.26 Final Answer

Analysis for Question C

Point 1: You need 649,637.05 in 30 years but you don’t have any savings yet

Point 2: You can't save not until 5 years time, Therefore, instead of 30 years savings, you can only save for 25 years annually

Point 3: We just have to find the annual savings required for 25 years to get the amount 649,637.05

Annual Savings = Amount needed / ((((1+Rate)^Term)-1)/Rate)

Annual Savings = 649,637.05 / ((((1+8%)^25)-1)/8%
Annual Savings = 649,637.05 / 73.10594
Annual Savings = 8,886.24 Final Answer
years and then;

s the the total future amount you will need to have at age 65

Value of the lump sum amount.

ill needed to have.

y that needs to be save to get that amount in 30 years

e for 25 years annually

Problem 16

Analysis for Question A

Point 1: You have 5,000,000 in Fund balance and it will grow 8% every year for 5 years

Point 2: For the next 5 years 2,000,000 will enter the fund. This is an annuity.

Point 3: We need to get the Future Values of Point 1 (FV of Simple Cash Flow) and Point 2 (FV of Annuity). Total it, to get the T

Point 4: Now, we Total the Values in Point 3, and calculate its Future Value (FV of Simple Cash Flow), just so we can have a ful

Point 5: Now we have to calculate the FV of the Expected Cash Outflows from Year 6 - 10 and subtract it to Point 4, to get the

Given:

Available Lump Sum amount of Fund 5,000,000

Cash Inflow from Years 1-5 2,000,000
Cash Outflow from Year 6-10 3,000,000
Rate 8%

Step 1 - Calculate FV of Simple Cash Flow for the 5,000,000 for 5 years

FV of 5,000,000 = 5,000,000 * ((1+Rate)^Term)

FV of 5,000,000 = 5,000,000 * ((1+8%)^5)
FV of 5,000,000 = 5,000,000 * 1.469328 1.4693280768
FV of 5,000,000 = 7,346,640

Step 2 - Calculate FV of Annuity for 5 years of the 2,000,000 annual cash flow

FV of Annuity of 2,000,000 = 2,000,000 * ((((1+Rate)^Term)-1)/Rate)

FV of Annuity of 2,000,000 = 2,000,000 * ((((1+8%)^5)-1)/8%)
FV of Annuity of 2,000,000 = 2,000,000 * 5.866601
FV of Annuity of 2,000,000 = 11,733,202

Step 3 - Calculate Total Fund Value in 5 years

FV of 5,000,000 7,346,640
FV of Annuity of 2,000,000 11,733,202
Total Value of Fund in 5 years 19,079,842

Step 4 - Calculate FV of Simple Cash Flow of Total Value of Fund in 5 years, for another 5 years
Total Fund Value at 10 years = 19,079,842 * ((1+Rate)^Term)
Total Fund Value at 10 years = 19,079,842 * ((1+8%)^5)
Total Fund Value at 10 years = 19,079,842 * 1.469328
Total Fund Value at 10 years = 28,034,547.55

Step 5 - Calculate the Future Value of Annuity of the Cash Outflows

Future Value of Annuity of the Cash Outflows = Annual Cash Outflow * ((((1+Rate)^Term)-1)/Rate)
Future Value of Annuity of the Cash Outflows = 3,000,000 * ((((1+8%)^5)-1)/8%)
Future Value of Annuity of the Cash Outflows = 3,000,000 * 5.866601
Future Value of Annuity of the Cash Outflows = 17,599,803

Step 6- Calculate Total Remaining Money on the fund

Total Fund Value at 10 years = 28,034,548

Less: FV of Annuity of the Cash Outflows 17,599,803
Total Remaining Money on the fund 10,434,745 834,779.57

Analysis for Question B

Point 1: From the Total Remaining Money on the fund, assuming it will earn 8% a year, how much money are you allowed to p

Point 2: Since the fund earns 8% a year, it is also the maximum amount that the fund can pay, paying in excess of 8% will not

Total Remaining Money on the fund 10,434,745

Multiply by 8%
Amount of Money the fund can affort to pay annually 834,780
nuity). Total it, to get the Total Fund Value at 5 years.

, just so we can have a full grasp of what the value could have been if there are no withdrawals

act it to Point 4, to get the remaining money left on the fund

 e)^Term)-1)/Rate)

money are you allowed to pay to pensioners without exhausting the fund in infinity

ng in excess of 8% will not sustain the fund for eternity.