time value money 14

  1. A self-employed person deposits $1,250 annually in a retirement account (called a SEP-IRA) that earns 5.5%.
    1. How much will be in the account at age 62 if the savings program starts when the individual is age 50?
    2. How much additional money will be in the account if the saver defers retirement until age 66 and continues the contributions until then?
    3. How much additional money will be in the account if the saver discontinues the contributions at age 62, but lets it build up until retirement at age 66?
  2. If a firm has $250,000 to invest and can earn 8.5%, compounded annually, how much will the firm have after two years?
  3. A father has decided to set aside a one time lump sum for college that will amount to $60,000 by the time his 5 year old is 18 years old (13 years). Use 8% as the rate. Figure the dollar amount to put in the fund assuming no further investments will be made. How much must he invest right now to amount to $60,000 in 13 years?
  4. You win a judgment in an auto accident for $275,000. You will immediately receive $135,000 in cash, but must pay your lawyer’s fee of $91,666 out of that sum. In addition you will receive $5,500 per year for 20 years for a total of $110,000 after which the balance owed of $30,000 will be paid. If the interest rate is 7 percent, what is the current value of your settlement?
  5. A firm borrows $935,000 for 7 years for a large item of equipment and installation costs. The interest rate is 7.5%. The loan requires that the interest and principal be paid in equal, annual payments that cover the interest and principal. The interest is determined on the declining balance that is owed. What are the annual payments and the amount by which the loan is reduced during the first year?
  6. A company leases equipment for seven years. The equipment costs $28,000 and the owner (called the “lessor”) wants to earn 9.5% on the lease. What should be the lease payments?

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