Solutions To Assignment TVM Practice Q

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1. James plans to fund his individual retirement account, beginning today, with 20 annual deposits of $2,000, which he will continue for the next 20 years. If he can earn an annual compound rate of 8 percent on his deposits, the amount in the account upon retirement will be 98845.84(since it is a retirement plan so, assumed to be annuity due) correct 91,523.93 – ordinary annuity in this accumulation phase. 2. $100 is received at the beginning of year 1, $200 is received at the beginning of year 2, and $300 is received at the beginning of year 3. If these cash flows are deposited at 12 percent, their combined future value at the end of year 3 is __727.37____. 3. Marla borrows $4,500 at 12 percent annually compounded interest…show more content…
How large an equal annual end‑of‑year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the beach house upon retirement? (Time/Marks 3) ANSWER: Value of the house at retirement = FV20 = Rs.92,86,541.97; Annual Saving = Annuity ordinary = Rs.1,14,723.97. Q 5. An oil well presently produces 50,000 barrels per year. It will last for 15 years more, but the production will fall by 5% p.a. Oil prices are expected to increase by 3% p.a. Currently the price of oil is $50 per barrel. What is the present value of the well’s production if the discount rate is 10% p.a. effective. (Time/Marks 5) ANSWER: 1 + Adjusted interest rate = 1+i = 1.10 /(0.95*1.03) = 1.124169647 => Adjusted interest rate = i = 0. 124169647; So the given cash flow stream (a growing annuity) is equivalent to a level annuity of Rs.25 lakh for 15 years @ an adjusted interest rate of i = 0. 124169647 => So the PVOA15 = (50,0000 x 50) x PVIFOA12.417%,15yrs = $25,00,0000 x 6.661923 = $166,54,807/-. Q. 4. Ellen is 35 and decides to plan seriously for her retirement. She wants to save Rs.10,000 in the 1st year, i,e., starting @ age 36. However, she expects her salary to increase each year so that she will be able to increase her savings by 5% per year from 2nd year onwards. With this plan, she expects to earn 10% per year on her savings.
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