After graduation, you plan to work for Donald’s Fashion Co. for 7 years and then start your own business. You expect to save and deposit $ 10,000 a year for the first 3 years (t = 1 through t = 3) and $14,000 annually for the next 4 years (t = 4 through t = 7). The first deposit will be made a year from today. In addition, your grandfather just gave you a $40,000 graduation gift which you will deposit immediately (t = 0). If the account earns 8% compounded annually, how much will you have when you start your business 7 years from now?
Mary turned 20 today, and she is planning to save $6,500 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that’s expected to provide a return of 6% per year. She plans to retire 35 years from today, when she turns 55, and she expects to live for 20 years after retirement, to age 75. Under these assumptions, how much can she spend each year after she retires, if she can earn 7 % per year after retirement. Her first withdrawal will be made at the end of her first retirement year.
Question 3 – 20 points
After working for a long time (25 years) with your company, you have decided to accept the company’s termination offer of $25,000 per year for 15 years or accept a lump sum of $277,950 one year from today.
- If you can earn 6 % per year on other investments, will you accept this lump sum or take the annuity payments? How much will you gain or loose if you accept the annuity? Show the calculations used to accept or reject any one of the two options.
- What interest rate the company is offering you in the annuity? Will your decision change?
- (a) If you want to be a millionaire in 15 years from now and you can only save $13,882 which you deposit at the end of every year for 15 years in a mutual fund, what interest rate must you earn to become a millionaire in 15 years? (answer to the closest interest rate)
- (b) Suppose you can earn the interest rate you calculated in part (a), how much must you deposit per year to be a millionaire in 10 years?
Jones started his own business and expects that his first yearly cash flows of $175,000 will be in three years from today and will grow at 3% in perpetuity. What is the company worth today if the discount rate is 11%?