Time Value of Money for a College Education
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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?
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