210 PART 2 Important Financial Concepts
WWWdeposit will be made at the end of year 1 and that the first distribution payment
will be received at the end of year 13.Required
a. Draw a time line depicting all of the cash flows associated with Sunrise’s view
of the retirement annuity.
b. How large a sum must Sunrise accumulate by the end of year 12 to provide
the 20-year, $42,000 annuity?
c. How large must Sunrise’s equal annual end-of-year deposits into the account
be over the 12-year accumulation period to fund fully Ms. Moran’s retire-
ment annuity?
d. How much would Sunrise have to deposit annually during the accumula-
tion period if it could earn 10% rather than 9% during the accumulation
period?
e. How much would Sunrise have to deposit annually during the accumulation
period if Ms. Moran’s retirement annuity were a perpetuity and all other
terms were the same as initially described?WEB EXERCISE Go to Web site http://www.arachnoid.com/lutusp/finance_old.html. Page down to the
portion of this screen that contains the financial calculator.
- To determine the FV of a fixed amount, enter the following:
Into PV, enter 1000; into np,enter 1; into pmt, enter 0; and, into ir,
enter 8.
Now click on Calculate FV, and 1080.00 should appear in the FVwindow. - Determine FV for each of the following compounding periods by changing
onlythe following:
a. npto 2, and irto 8/2
b. npto 12, and irto 8/12
c. npto 52, and irto 8/52 - To determine the PV of a fixed amount, enter the following:
Into FV, 1080; into np, 1; into pmt, 0; and, into ir, 8. Now click on
Calculate PV. What is the PV? - To determine the FV of an annuity, enter the following:
Into PV, 0; into FV, 0; into np, 12; intopmt, 1000; and, intoir, 8. Now
click on Calculate FV. What is the FV? - To determine the PVof an annuity, change only the FVsetting to 0; keep
the other entries the same as in question 4. Click on Calculate PV. What is
the PV? - Check your answers for questions 4 and 5 by using the techniques discussed
in this chapter.