Question

1) Suppose you are 25 years old, and receive an inheritance that will become $ 1,000,0000 when you turn 65 years old (i.e., 1 million dollars, 40 years from now). Assume the interest rate is 10%. What is the amount of your inheritance? How does your calculation change if the interest rate is now 7%? 2) Suppose you are 25 years old, and want to have $ 1,000,0000 when you turn 65 years old (i.e., 1 million dollars, 40 years from now). Assume the interest rate is 10%. How much should you save each month? How does your calculation change if the interest rate is now 7%?

Answer 1

1) Amount of inheritance will be $1 million in 40 years, so to calculate inheritance, we just calculate present value of $1 million dollars. Assuming interest rate is 10% per annum:

8=10% P = A - 1,000,000 Chu 40 = $ 22094, 928 (1+r) to

If rate changes to 7%:

1, те, бо $ 66 7 8 6+%o 9 38 1.07) to

2)Since we are saving EACH MONTH, and annual interest rate is 10%, effective interest rate would be 0.1/12. Number of periods is 40*12=480. Now, we calculate value of fixed income per month so that 40 years from now, present value of my stream is $1 million:

+ A +.... A ਅਕਸ ਵਾਰ A + $1.0 2 , p ਆ ( 480 ? ਜਾ h tr | 2 8o 6 ॥ 12 A 5 1, 000, 60 % 6.। (1B 14tv A 2 $ 3 44, 44

When rate is 7%:

9.7% A = 1,000,000 x 0.07 x 12 LP 7+0.02.1960 +0.07 12 A = $6214.312