1.

Justify Emily’s participation in her employer’s 401(k) plan using the time value of money
concepts by explaining how much an investment of $10,000 will grow to in 40 years if it earns
10%.
Expected annuity amount = $10,000
Tim period = 40 years
Interest rate = 10%
Formula for future value of annuity is
P = PMT [((1 + r)n – 1) / r]
P = 10000*(((1+10%)^40 -1)/10%)
P = $4,425,925,56
Calculate the amount of money that Emily need to set aside from her bonus this year to cover the
down payment on a new car, assuming she can earn 6% on her savings. What if she could earn
10% on her savings?
Amount needed for car down payment = $7,000
Time period = 3 Years
Interest rate = 6%
Amount she should set aside = 7000/ (1+6%)^3 = $5877.33
If she can manage to earn 10% on her savings
Amount she should set aside = 7000/ (1+10%)^3 = $5259.20
 
What will be the value of Emily’s trust fund at age 60, assuming she takes possession of half of
the money ($25,000 of the $50,000 trust fund) at the age 30 for a house down payment, and
leaves the other half of the money untouched where it is currently invested?
Amount left as investment = $25,000
Interest rate = 7%
Time Period = 60-30 = 30 Years
Emily’s trust fund at the age of 60 = 25000*(1+7%)^30 = $190,306.38
What is the relationship between discounting and compounding?
Discounting is used to find out the present value of a cash flow, given its future value. Whereas compounding
is used to find the future value of a cash flow given its present value.
List at least two actions that Emily and Paul could take to accumulate more for their retirement
(think about i and n).
They can think of investing the balance trust fund of $25,000 at higher rate of return of 10%
Amount they will get if they invest at 10% rate = 25000*(1+10%)^30 = $436,235.06
They can invest $5000 more in the 401(k) earning 10% for the balance period of 33 years
Future value of annuity of 5000 = 5000*(((1+10%)^33 -1)/10%)= $1,111,257.72