Question

Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with retirement income of $24,000 per month for 25 years, with the first payment received 30 years and 1 month from now. Second, he would like to purchase a cabin in Rivendell in 10 years at an estimated cost of $273,000. Third, after he passes on at the end of the 25 years of withdrawals, he would like to leave an inheritance of $650,000 to his nephew Frodo. He can afford to save $1,800 per month for the next 10 years.

  

Required:

If he can earn a 9 percent EAR before he retires and a 8 percent EAR after he retires, how much will he have to save each month in years 11 through 30?

$4,533.98

$4,624.66

$5,027.63

$4,443.30

$4,982.53

Answer 1

We can calculate the desired result in excel sheet as follows:

Income after retirement = $ 24,000 per month

Inheritance Amount = $ 650,000

EAR before retirement = 9%

EAR after retirement = 8%

Firstly we will convert EAR to APR :

Formulas used in the excel sheet are:

So, the correct answer is option (a) that is $ 4,533.98