Share
Explore BrainMass

# Compute the amount that a \$30,000 investment today

Part (a) Compute the amount that a \$30,000 investment today would accumulate at 10% (compound interest) by the end of 6 years.

Part (b) Tom wants to retire at the end of this year (2004). His life expectancy is 20 years from his retirement. Tom has come to you, his CPA, to learn how much he should deposit on December 31, 2004 to be able to withdraw \$50,000 at the end of each year for the next 20 years, assuming the amount on deposit will earn 8% interest annually.

Part (c) Nancy Houser has a \$1,500 overdue debt for medical books and supplies at Ken's Bookstore. She has only \$500 in her checking account and doesn't want her parents to know about this debt. Ken's tells her that she may settle the account in one of two ways since she can't pay it all now:

1. Pay \$500 now and \$1,200 when she completes her residency, two years from today.
2. Pay \$2,000 one year after completion of residency, three years from today.

Assuming that the cost of money is the only factor in Nancy's decision and that the cost of money to her is 8%, which alternative should she choose? Your answer must be supported with calculations.

#### Solution Preview

** See ATTACHED file(s) for complete details **

Part (a) Compute the amount that a \$30,000 investment today would
accumulate at 10% (compound interest) by the end of 6
years.

FV = PV (1+i)n where PV is the present value
FV is the future value
i is the interest rate
n is the period

FV = 30,000(1 + 0.10)6
= 53,146.83

Part (b) Tom wants to retire at the end of this year (2004). His
life expectancy is 20 years from his retirement. Tom has
come to you, his CPA, to ...

#### Solution Summary

This solution is comprised of a detailed explanation to answer which alternative should she choose.

\$2.19