Question

Please show all of the factors used in the calculation – PV, I/Y, N, etc. – NOT just the answer. If the calculation involves an annuity, please indicate if it is an ordinary annuity or an annuity due.

1. a. On January 1, 2019 Tom Jeffers come to you, his CPA, and tells you he wants to retire in 10 years. His life expectancy is 20 years from his retirement. How much should he

deposit on December 31, 2028 to be able to withdraw $3,000 at the beginning of each month for the next 20 years, assuming the amount on deposit will earn 4% interest compounded monthly?

   b. For a possible bonus point, if he begins to save now, how much would he have to deposit at the end of each month in order to have that amount when he retires assuming he can now earn 5% compounded monthly?

Answer 1

A.

(i) Facts of the case:

Life Expectance (Period) = 20years

Expected Return =4%

Inorder to determine the amount to be deposited today to earn regular income of $3,000 for the next 20years , assuming a set interest rate we will need to calculate the Present Value of the Future cash Flows

For the first year it will be  

Second year will be similarly for all the 20 years

Thus the Present value will be:

PV Ordinary Annuity = C x

Pv Ordinary Annuity = 3,000 * 13.590

Pv = $ 40,771.

Thus Tom Jeffers will require to invest $40,771 on December 31, 2028 to be able to withdraw $3,000 for the next 20 years of expected life .

B. As on today i.e 01st January 2019 Tom Jeffers has Invest "x" amount to earn $40,771 after 10 years

FV= PV ( 1+r)

Pv = = $ 27,543