Client - 1:

Mrs. Adele E had four grandchildren, the oldest of which would be entering college in ten years. She wanted
to provide assistance for their education by giving each child $10,000 a year for the four years that each would
be in college. She currently had about $40,000 in the bank from the sale of a small house near the Boardwalk
and was wondering whether or not this could be invested to earn enough to provide for the $160,000 that
would be needed for the four grandchildren.

In reading the file , Larson learned that the first child would start college in exactly ten years , the second two
years later, the third one year after that and fourth two years after the third. The funds would be left in the
investment and withdrawal only as needed. The expectation was that at the end of the last year of the last
child’s college experience, the account would be exhausted and have a zero balance. Larson felt that 12 per
cent per year, compounded annually would be a reasonable estimate for a return on the $40,000 investment
over its life.

Question:
Is the $40,000 sufficient to provide for the four scholarships, paying the money as needed?

Answer:
Calculation of period in year

Time period (year)

0 10 11 12 13 14 15 16 17 18

0 -10 -10 -20 -30 -20 -30 -20 -10 -10

Cash out flow Cash in thousand

Now present value (PV) of future uneven cash flow steam will be
Or,

Comments

Mrs. Adele E is required only to provide assistance for education of her four grandchildren. As

currently she has $40,000, so this amount is sufficient.

Client - 2:

John and Mary C were a middle-aged couple in the midst of planning for their retirement. John was fifty-five
and had decided to put the maximum amount $2,000 into an IRA account for the next ten years. He was
planning to retire at sixty-five. The couple felt they should make arrangements for the following twenty years
and were not concerned about planning beyond the age of eighty-five. They wanted the funds that
accumulated in the IRA to purchase a twenty year annuity. They had one child, whom they wished to leave or
give $50,000 when they reached eighty-five.

Based on the investment opportunities available, Larson felt that a 10 percent interest rate should be used in
evaluating their situation. The couple was concerned about how much of an annuity to purchase at retirement
that would still leave enough in their investment to grow to $50,000 in twenty years.

Question:
How much of an annuity will the couple be able to purchase at retirement leaving enough in the account to
grow to $50,000 in twenty years?

Answer:

= $ 2,000 [{(1+0.10)^10-1}/0.10]

= $ 2000 × 15.937
 = $ 31,874

Their savings in IRA account after 10 years would be $ 31,874. So they would require another $18,126 for
growing their fund to $ 50,000.

FVA

$18,126= PMT [{(1.10) ^20 -1} ÷ 0.10]

PMT [{(1.10) ^20 -1} ÷ 0.10] = $18,126
PMT [(6.727 -1) ÷ 0.10] = $18,126
PMT (57.27) = $18,126
PMT = $18,126 ÷ 57.27

PMT 316.50

Comments:
The couple will be able to purchase an annuity of $316.50 at retirement leaving enough in the account to grow
to $50,000 in 20 years

Client - 3:

Ansel and Harriet W. were a young highly educated professional couple both employed by one of the leading
resort hotels in the area. They were planning on saving for a new house, which they expected to purchase in
seven years, In addition to that financial requirement, they felt that Harriet would quit working at that time to
care for their expected family and that the loss of her income would make them unable to keep up payments
on the house without an annuity to supplement his income.

The couple felt that they needed $1,500 a year in supplemental income beginning at the end of the eight year
to assist with the house payments and that they needed this for each of the next thirty years. They also wanted
to have $50,000 with which to make the down payments in seven years when they planned to buy the house.
As both were working , they had plenty of funds for savings and were wondering how much they should put
away at the end of each of the next seven years to be able to make the down payment and buy the annuity.
Larson felt that an 11 percent interest rate applied to their situation.

Question:
How much must the couple save each year and deposit at the end of the year at 11 percent interest to meet
their goals?

Answer:
 =

PVA =$1,500[{1-1/(1.11)^23}/0.11]
PVA =$1,500[(1-0.0906)/0.11]

PVA 1,500x8.267

PVA = $12,400.50

They also require $ 50,000 to make the down payment in seven years. So their total requirement is $
62,400.50 ($50,000 +$12,400.50) and this total amount will be future value for the 7 years.

Or, 62,400.50 =

Or, 62,400.50 = × 9.782

$ 6,379.11

Comments:

The couple would require $ 6,379.11 to save and deposit at the end of the year at 11 percent interest to meet
their goals.

Client - 4:
Arthur F’s situation also involved the amount of $ 40,000. He had received an inheritance of $40,000 from a
great aunt and had been offered an annuity of $5,000 a year for twenty-five years, or a total of $125,000 at a
cost of $40,000. He also had a number of alternatives available, the lowest of which offered 12 percent annual
compounded return. Arthur F, liked the annuity, but was willing to invest in it only if it offered a 12 percent
return or better.

Question:
Should the individual accept the annuity?

Answer:

=
$40,000 =PMT [{1-1/(1.12)^25}/0.12]
$40,000 =PMT [(1-0.0588)/0.12]

PMTx7.843=$40,000

PMT= $40000/7.843

PMT= $5,100

Comments:
At 12% return, annuity should be $ 5,100 per year. But she/he has been offered $ 5,000. So, individual should
not accept the annuity.