In each of the next five years , you must make a large payment as indicated...

In each of the next five years , you must make a large payment as indicated in the table below. You want to set aside money today, earning 8% interest, which will be sufficient to pay these bills year 1 payment $5,000 year 2-$40000 year 3-$6,000 year 4-$10,000 year 5-$3,000 a. how much money do you need today? b. what effect would an increase in the rate of return have on your answer to part a explain

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Expert Solution

a. Money needed today to make large payments shall be as follows :

Timeline	Cash Outflow	PVF @ 8%	Present Value
Year 1	$ 5,000.00	0.9259	$ 4,629.63
Year 2	$ 40,000.00	0.8573	$ 34,293.55
Year 3	$ 6,000.00	0.7938	$ 4,762.99
Year 4	$ 10,000.00	0.7350	$ 7,350.30
Year 5	$ 3,000.00	0.6806	$ 2,041.75
Present Value of future cash outflow			$ 53,078.22

Hence, you required $ 53078.22 to be invested today at 8% to make bill payment year 1 payment $5,000 year 2-$40000 year 3-$6,000 year 4-$10,000 year 5-$3,000

b . To substatiate Impact of increase in rate of return, we shall assume rate of return be 9%

Timeline	Cash Outflow	PVF @ 9%	Present Value
Year 1	$ 5,000.00	0.9174	$ 4,587.16
Year 2	$ 40,000.00	0.8417	$ 33,667.20
Year 3	$ 6,000.00	0.7722	$ 4,633.10
Year 4	$ 10,000.00	0.7084	$ 7,084.25
Year 5	$ 3,000.00	0.6499	$ 1,949.79
Present Value of future cash outflow			$ 51,921.50

Therefore, increase in rate of return will require lower amount of investment today for same payout in future.

jeff jeffy answered 1 year ago

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