Finance Essay

651 WordsApr 30, 20123 Pages
| Assignment #1: Financial Decisions | | Fin534 | Angela Nolan | 7/16/2011 | | In this problem I am to assume that I’m saving for retirement. At present date I’m 30 years old and want to have $2 million upon retirement at age 65. The rate of interest earned is 5%. The present value (PV) of cash flow must equal the present value of $2 million in 35 years. PV = C x 1/r ( 1- {1/(1+r)35 + C PV = 2000000/ (1 + 0.05)35 = 2000000/5.516015368 = 362580.5707 The present value of the two million dollars is three hundred, sixty-two thousand five hundred eighty-one dollars. Now that the present value part of the equation has been solved, we can now solve for the cash flow (future value). C = 362580.5707/ 1/0.05( {1 – (1/(1 + 0.05)35} + 1 C = 362580.5707/ 20 (1-{1/5.516015368} + 1 C= 362580.5707 / 20(1-0.181290285) + 1 C = 362580.5707 / 20 (0.818709715) + 1 C = 362580.5707/17.37419429 C= 20868.91 To insure that I have two million dollars at age sixty-five, I will need to set aside $20,868.91 each year beginning today for the next 35 years. This is an annuity to be paid yearly. If now the amount that I set aside will grow by 3% how much do I need to put into the account today. From the previous equation the PV is $362,580.5707 The calculation is as follows: C = 362580.5707 /1.03/ 0.05-0.03{1 – (1.03/1.05)35 C = 362580.5707 / 51.5( 1 – 0.510125927) + 1 C = 362580.5707 / 51.5(0.48987403)+1 C = 362580.5707 / 26.2251255 C = 13825.6944 or $13826 With this solution I should deposit $13826 yearly to have the desired $2 million at age 65. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years. Knowing what amount you desire to have in the future can help you determine that amount that you will need to save yearly. Knowing how to use the formulas you can also compute whether

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