The Time Value of money

crgrcrgnb
timer Asked: Nov 9th, 2017

Question Description

Issue A

Considering the amount of the money deposited by Mary will be by the end of 20 years and one year from today, the principal amount will change. Hence, Principal will become the amount currently in the account. If Mary considers closing the account after making another deposit of $500, $16,533is the amount in the bank at the end of the last deposit and closer of the account.

This is the pay-out per year based on the University’s package. Hence, for the following 19 years $2,803,422.37+ 75000=$2,878,422.37. Therefore, this is the amount she could receive after waiting for 20 years.

Issue B

Based on Mary, after she retires she wants to be paid in a lump sum amount. This is important and essential in calculating the overall amount into which Mary could receive in 20 years as the principal amount. To calculate the amount she could be paid as a lump sum;

Issue c

Therefore, if Mary wants to be paid in a lump sum, the amount she could earn and be paid in once $743,839.039.Therefore, the amount Mary could earn as her retirement package is $743,839.039.

According to the calculations above, it is essential and critical to consider the importance and necessity of being paid in a one lump sum.

Issue D

Mary wants to help pay for her granddaughter Beth’s education. She has decided to pay for half of the tuition costs at State University, which are now $11,000 per year. Tuition is expected to increase at a rate of 7% per year into the foreseeable future. Beth just had her 12th birthday. Beth plans to start college on her 18th birthday and finish in four years. Mary will make a deposit today and continue making deposits each year until Beth starts college. The account will earn 4% interest, compounded annually. How much must Mary’s deposits be each year in order to pay half of Beth’s tuition at the beginning of each school each year?

Mary has decided to pay half of the school fees, which is $5500. The $5500 is the principal amount. The interest rate in the account is 4% which is compounded annually.The time for starting college is indicated as {(18-12) + 4} =10 years.Fees will increase by 7% per year in a foreseeable future. Hence, total fees that Mary will pay in each year of Beth’s college are calculated below

The total fees that Mary should contribute to Beth’s college education is $39, 343 + $47,597 + $56,428 + $65,879= $209,247

Mary wants to start making deposits each which will cover the fees she will contribute to Beth’s college fees. The deposit will earn a 4% interest earned annually for 6 years until Beth starts college.

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