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Problem 1
Solved in the class. Previous year question
Problem 2
= 476.19x8.514 = 4054.28
Alternatively, we can increase interest rate for two years and period by 10
years (20/2)
=(1.10)x(1.10)-1= 21%
=1000Xpvifa 10years
= 4047.62
Problem 3
a. The annuity of $10,000 per year for 15 years at 5 percent. The discount
factor in the PVIFA table is 10.380
Purchase price is = 10000x10.380= 103,800
As the insurance company is able to earn more on the amount put up,
it requires a lower purchase price.
Problem 4
Problem 5
Answer:
First, we will calculate the present value of the college expenses for each child.
Total expenses: $35,000 x 2 = $70,000
T = 4 years of college
PVA = C (1-1/(1+r)t / r )
PVA = $70,000 ( 1- 1/ (1+0.085)4 / 0.085)
PVA = $ 70,000 (1 – 1/1.3858 / 0.085)
PVA =$70,000 (1 – 0.72160 /0.085)
PVA = $70,000 (0.2784 / 0.085)
PVA = $70,000 (3.2753)
PVA = $229270.59 total expenses for two Childs
@ = $229270.59 /2
@=$114635.29 expenses for each child.
This is the cost of each child college expenses one year before they enter
college. So, the cost of the oldest child’s college expenses today will be:
PV = FV/(1+r)14
PV = $114635.29 / 1.08514
PV = $114635.29 / 3.1334
PV = $36584.95
And the cost of the youngest child college expenses today will be:
PV = FV/ (1+r)16
PV = $114635.29 / 1.08516
PV = $114635.95 / 3.6887
PV = $31077.43
Therefore, the total cost today of your children’s college expenses is:
Cost today = $36584.95 + $31077.43
Cost today = $67662.38
This is the present value of your annual savings, which are an annuity. So,
the amount you must save each year will be:
PVA = C (1-1/(1+r)t / r )
$67662.38 = C (1 – 1/(1.085)15 /0.085)
$67622.38 = C (1 – 1/ 3.3997 / 0.085)
$67622.38 = C (0.7059 / 0.085)
$67622.38 = 8.3047 C
C =$ 8142.66
Note:
“An annuity is a level stream of regulars payments that last for a fixed number
of periods. Not surprisingly, annuities are among the most common kinds of
financial instruments. The pensions that people receive when they retire are
often in the form of an annuity. Leases and mortgages are also often
annuities…”