Fin401 Lasa1

LASA

FIN401

M3-A2

Aaron Rose

Issue A:

For the last 19 years, Mary has been depositing $500 in her savings account , which has earned 5% per year, compounded annually and is expected to continue paying that amount. Mary will make one more $500 deposit one year from today. If Mary closes the account right after she makes the last deposit, how much will this account be worth at that time?

To start, the 20th payment is not going to count into the earned interest amounts. This is because she will be taking the money out as soon as she puts it is the bank. This puts our focus on the 19 payments that will receive earned interest. The long way of solving this would involve calculating how much each payment will gain throughout the time period.

Formula:

FV=PV(1+i)^n (Block, S., Danielsen, B., Hirt, G., 2009, p.258)

FV=500(1.05)^19

FV=1,263.48

This is the amount just the first payment would earn. You could then continue replacing n for 18,17,16, and so on down to one Then adding them all up including $500 for the 20th payment. An easier way to do this is using the chart in the book along with the formula below.

FVa= A x FVifa (Block, S., Danielsen, B., Hirt, G., 2009, p.260)

Appendix C (Block, S., Danielsen, B., Hirt, G., 2009, p.A-7) shows us 19 payments at 5% is 30.539, which is the FVifa. We then multiply 30.539 by $500 and get $15,269.5 + $500 for the final deposit = $15,769.5.

Issue B:

Mary has been working at the university for 25 years, with an excellent record of service. As a result, the board wants to reward her with a bonus to her retirement package. They are offering her $75,000 a year for 20 years, starting one...