Question

Funding budget shortfalls Personal Finance Problem As part of your personal budgeting process, you have determined that in each of the next 5 years you will have budget shortfalls. In other words, you will need the amounts shown in the following table at the end of the g en ear to balance your budget that s to make inflows equal ou o s You expect to be able to earn 7% on your vestments du g the next 5 years and w Sh to fund the budget shortfalls over the next 5 years with a s ngle amount a. How large must the single deposit today into an account paying 7% annual interest be to provide for full coverage of the anticipated budget shortfalls? Ignore taxes. b. What efoct would an increase in your earnings rate have on the amount calculated in part a? Explain a. The single deposit today to provide for full coverage of the anticipated budget shortfalls is $ b. What effect would an increase in your earnings rate have on the amount calculated in part a? Explain. (Select the best answer below) O A. (Round to the nearest dollar) An increase in the earnings rate would increase the amount calculated in part a The higher rate would lead to a larger interest income being earned each year on the investment. The larger interest amounts will permit a decrease in the initial investment to obtain the same future value available for covering the O B. An increase in the earnings rate would increase the amount calculated in part a. The higher rate would lead to a smaller interest income being earned each year on the investment. The smaller interest amounts will permit a increase in the initial investment to obtain the same future value avaiable for covering the shortfal An increase in the earnings rate would reduce the amount calculated in part a The higher rate would lead to a larger interest income being earned each year on the investment. The larger interest amounts will permit a decrease in the intial investment to obtain the same future value available for covering the C. O D. An increase in the earnings rate would reduce the amount calculated in part a. The lower rate would lead to a larger interest income being earned each year on the investment. The larger interest amounts will permit a decrease in the initial investment to obtain the same future value available for covering the 1: Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet) End of year Budget shortfall o $10,000 $12,000 $11,000 $6,000 $6,000

Answer 1

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