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Time Value of Money for a College Education

Problem 1
Paul wants to save money for his son's education and for his own retirement. His son jimmy. Who is now 10 yrs old will need $25,000 a year for 4 yrs when he starts college 8 yrs from now. Paul, who is now 40 yrs old, he plans to retire at 60 years of age with an annual retirement income of $60,000 a year and he expects to live to be 80 yrs old. Using an interest rate of 8% how much Paul must save annually to provide for his retirement and his son's college education?

Problem 2
An insurance company is willing to settle a dispute with you. They will pay you $10,000 per year for the next 18 years, or one lump sum right now. Assuming your money is worth 5%, how much would you be willing to settle for?

Problem 3
You currently receive $10,000 per year on an annuity contract. It will expire in 8 years. Someone wants to buy the contract from you. If you can earn 12% on other investments of the same quality and risk, how much would you be willing to sell the contract for?

Solution Summary

The solution explains some questions relating to time value of money

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