Question

a. “If you are 18 years of age and save RM1.00 each day for the rest of your life, you can become a millionaire”. Let’s assume that you live to age 65 and that the annual interest rate is 10 %. Assuming that the total day per year are 365 day. Provide a proven of this statement

b)         A father, on the day his son is born, wishes to determine what lump sum amount would have to be paid into an account bearing interest of 8 % per year to provide withdrawals of RM 2, 500 on each of the son’s 18^th, 19^th, 20^th and 21^st birthdays.

1. Draw the cash flow diagram.
2. Determine the lump sum amount on the son’s 16^th, when a father need to make a withdrawal?.
3. Determine the lump sum amount would have to pay three (3) year before his son is born.

Answer 1

a. Daily saving, P = RM 1, Annual interest rate, i = 10% per year

Number of years, n = 65 - 18 = 47 years

m = 365

Number of days = 365 × 47 = 17,155 days

After 65 years we will have RM 397,399

You can accumulate an amount equal to RM 397,399.

And it is not equal to million.

b. Refer the attached picture below

ii. Lump sum amount on the sons 16th birthday.

iii. When the amount is invested 3 years before the birth. The amount will be

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