Author Question: Assume that Don is 45 years old and has 20 years for saving until he retires. He expects an APR of ... (Read 91 times)

Mr3Hunna · **on:** Jul 10, 2018

Assume that Don is 45 years old and has 20 years for saving until he retires. He expects an APR of 8.5 on his investments.

How much does he need to save if he puts money away annually in equal end-of-the-year amounts to achieve a future value of one million dollars in 20 years' time?
A) 20,570.00
B) 20,670.97
C) 20,770.90
D) 20,800.00

Question 2

You invest 25,000 at an annual rate of 7.25 for one year. What is the difference in interest earned if you compound this money on a daily basis instead of an annual basis?

What will be an ideal response?

harveenkau8139 · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

Answer: B
Explanation: B) Using the FVIFA formula for r = 8.50 and n = 20, we get FVIFA = 48.377013. The annuity payment we need to put away each year is: PMT = = = 20,670.97.
MODE = END
INPUT 20 8.5 0 ? -1,000,000
KEY N I/Y PV PMT FV
CPT 20,670.97

Answer to Question 2

Answer: For the annual basis, the periodic rate is the same as the annual rate of 7.25. With a PV of 25,000 and APR of 7.25, we have 1.0725 times PV equals 26,812.50, rendering an interest earned of 26,812.50 - 25,000 = 1,812.50. For the daily basis, we have C/Y of 365, periodic interest rate = r = 0.019863 (0.00019863). Taking (1 + periodic rate) to the power of C/Y gives: (1.00019863)365 = 1.075185. Multiplying this number by PV gives 26,879.63, rendering an interest earned of 26,879.63 - 25,000 = 1,879.63. Thus, the difference in interest earned is 1,879.63 - 1,812.50 = 67.13.