Question

Please answer the following questions. All questions are separate, not related. Thanks

1. You just graduated and landed your first job in your new career. You remember that your favorite finance professor told you to begin the painless job of saving for retirement as soon as possible, so you decided to put away $5,000 at the end of each year in a Roth IRA. Your expected annual rate of return on the IRA is 6%. How much will you accumulate at retirement after 40 years of investing?
2. The present value of a perpetuity that pays $200 a year using an annual discount rate 7% is closest to:
3. Which one of the following is a use of cash? a) Decrease in inventories, b) Decrease in fixed assets, c) Decrease in accounts payable d) Increase in common equity
4. Assuming you are a rational investor, the amount you should be willing to pay for a 20 year ordinary annuity that makes payments of $4,000 per year and you require a 6% return per year is closest to:

Answer 1

You just graduated and landed your first job in your new career. You remember that your favorite finance professor told you to begin the painless job of saving for retirement as soon as possible, so you decided to put away $5,000 at the end of each year in a Roth IRA. Your expected annual rate of return on the IRA is 6%. How much will you accumulate at retirement after 40 years of investing?

Annuity, A = 5,000; R = 6%; N = 40 years

Hence, accumulated amount = FV of annuity = A / R x [(1 + R)^N - 1] = 5,000 / 6% x [(1 + 6%)⁴⁰ - 1] =  773,810

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The present value of a perpetuity that pays $200 a year using an annual discount rate 7% is closest to:

PV of perpetuity = P / R = 200 / 7% =  2,857

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Which one of the following is a use of cash? a) Decrease in inventories, b) Decrease in fixed assets, c) Decrease in accounts payable d) Increase in common equity

Option c) Decrease in accounts payable

Cash is used to payout the outstanding portion and hence accounts payable reduces.

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Assuming you are a rational investor, the amount you should be willing to pay for a 20 year ordinary annuity that makes payments of $4,000 per year and you require a 6% return per year is closest to:

PV of annuity = A / R x [1 - (1 + R)^-N] = 4,000 / 6% x [1 - (1 + 6%)^-20] =  45,880