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Chapter 6: Q11Q (page 301)

Question:The Kellys are planning for a retirement home. They estimate they will need $200,000 4 years from now to purchase this home. Assuming an interest rate of 10%, what amount must be deposited at the end of each of the 4 years to fund the home price? (Round to two decimal places.)

Short Answer

Expert verified

The amount to be deposited each year will be $43094

Step by step solution

01

Step-by-stem solutionStep 1

Future values of annuity refer to the total value of a series of recurring payments at some specific date in the future.

02

Step 2

Amountdepositedeachyear=AmountneededRate(futurevalueofanordinaryannuityat10%for4years)=2000004.64100=$43094

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Most popular questions from this chapter

Question:What are the components of an interest rate? Why is it important for accountants to understand these components?

Sally Medavoy will invest $8,000 a year for 20 years in a fund that will earn 6% annual interest. If the first payment into the fund occurs today, what amount will be in the fund in 20 years? If the first payment occurs at year-end, what amount will be in the fund in 20 years?

Howie Long has just learned he has won a \(500,000 prize in the lottery. The lottery has given him two options for receiving the payments. (1) If Howie takes all the money today, the state and federal governments will deduct taxes at a rate of 46% immediately. (2) Alternatively, the lottery offers Howie a payout of 20 equal payments of \)36,000 with the first payment occurring when Howie turns in the winning ticket. Howie will be taxed on each of these payments at a rate of 25%.

Instructions Assuming Howie can earn an 8% rate of return (compounded annually) on any money invested during this period, which payout option should he choose?

Using the appropriate interest table, provide the solution to each of the following four questions by computing the unknowns.

(a) What is the amount of the payments that Ned Winslow must make at the end of each of 8 years to accumulate a fund of \(90,000 by the end of the eighth year, if the fund earns 8% interest, compounded annually?

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(c) Diane Ross has \(20,000 to invest today at 9% to pay a debt of \)47,347. How many years will it take her to accumulate enough to liquidate the debt?

(d) Cindy Houston has a \(27,600 debt that she wishes to repay 4 years from today; she has \)19,553 that she intends to invest for the 4 years. What rate of interest will she need to earn annually in order to accumulate enough to pay the debt?

Clarence Weatherspoon, a super salesman contemplating retirement on his fifty-fifth birthday, decides to create a fund on an 8% basis that will enable him to withdraw $20,000 per year on June 30, beginning in 2021 and continuing through 2024. To develop this fund, Clarence intends to make equal contributions on June 30 of each of the years 2017鈥�2020. Instructions

(a) How much must the balance of the fund equal on June 30, 2020, in order for Clarence to satisfy his objective?

(b) What are each of Clarence鈥檚 contributions to the fund?
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