Chapter 6: Question 14BE (page 302)
Amy Monroe wants to create a fund today that will enable her to withdraw $25,000 per year for 8 years, with the first withdrawal to take place 5 years from today. If the fund earns 8% interest, how much must Amy invest today?
Amy should invest $105,599 today.
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John Fillmore’s lifelong dream is to own his own fishing boat to use in his retirement. John has recently come into an inheritance of \(400,000. He estimates that the boat he wants will cost \)300,000 when he retires in 5 years. How much of his inheritance must he invest at an annual rate of 8% (compounded annually) to buy the boat at retirement?
Alan Jackson invests $20,000 at 8% annual interest, leaving the money invested without withdrawing any of the interest for 8 years. At the end of the 8 years, Alan withdraws the accumulated amount of money. Instructions (a) Compute the amount Alan would withdraw assuming the investment earns simple interest. (b) Compute the amount Alan would withdraw assuming the investment earns interest compounded annually. (c) Compute the amount Alan would withdraw assuming the investment earns interest compounded semiannually
Ellison Inc., a manufacturer of steel school lockers, plans to purchase a new punch press for use in its manufacturing process. After contacting the appropriate vendors, the purchasing department received differing terms and options from each vendor. The Engineering Department has determined that each vendor’s punch press is substantially identical and each has a useful life of 20 years. In addition, Engineering has estimated that required year-end maintenance costs will be \(1,000 per year for the first 5 years, \)2,000 per year for the next 10 years, and \(3,000 per year for the last 5 years. Following is each vendor’s sales package.
Vendor A: \)55,000 cash at time of delivery and 10 year-end payments of \(18,000 each. Vendor A offers all its customers the right to purchase at the time of sale a separate 20-year maintenance service contract, under which Vendor A will perform all year-end maintenance at a one-time initial cost of \)10,000.
Vendor B: Forty semiannual payments of \(9,500 each, with the first installment due upon delivery. Vendor B will perform all year-end maintenance for the next 20 years at no extra charge.
Vendor C: Full cash price of \)150,000 will be due upon delivery.
Instructions Assuming that both Vendors A and B will be able to perform the required year-end maintenance, Ellison’s cost of funds is 10%, and the machine will be purchased on January 1, from which vendor should the press be purchased?
What would you pay for a \(100,000 debenture bond that matures in 15 years and pays \)5,000 a year in interest if you wanted to earn a yield of: (a) 4%? (b) 5%? (c) 6%?
Steve Madison needs $250,000 in 10 years. How much must he invest at the end of each year, at 5% interest, to meet his needs?
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