Question

Axelrod Ltd. wishes to accumulate its cash so it will have $8.06 million sometime in the future. Independent of any financial information provided for Axelrod in its financial statements, assume they invest $1.15 million annually over 5 years, starting today, assuming a 4.5% per annum return. They stop investing after their 5th deposit of $1.15 million. They will then leave the accumulated funds in their account to grow until it reaches their goal of $8.06 million How many years in total will it take to reach their goal?

a. How many years from today will it take Axelrod to reach its goal? (Round up to the nearest year.) (4 points)

b. In a separate matter, the CEO, Bobbie Axelrod, wants to determine how much he must save for his son’s university education. His son will start university in 3 years and the cost is estimated to be $34,000 per year over 4 years (withdrawn at the beginning of each year). Assume Bobbie makes his first deposit into a savings account in one year and wants to make 3 equal annual deposits in total. If he earns 3% annually on his savings account, how large must his annual deposit be? (Round to the nearest dollar.) (4 points)

Answer 1

To know the number of years, firstly we need to know the amount that will be compounded to become the final future value.

After the Future Value of Annuity (FVA) is determined, a comparison between the then present value and final future value will give us the no.of years which comes out to be in between 5-6 years, leaning towards approximately 6 years.

Please find below the calculation for your reference