DO THE MATH 1. Real Income. Joshua Vermier of Sacra- she begins an investment program of $2,400 per mento, California, received a raise after year in an investment yielding 4 percent, what his first year on the job to $45,800 from will be the value of the fund after three years? his initial salary of $44,000. What was Joshua's raise stated as a percentage? If DO IT IN CLASS (Hint: Use Appendix A.3 or the Garman/Forgue inflation averaged 2.8 percent for the year, Page 12 companion website.) what was his real income after the raise? What was his (d) Megan's Aunt Karroll told her that she would give real raise stated as a percentage? Megan $1,000 at the end of cach year for the next Future Value. As a graduating senior, Chun three years to help with her college expenses. As- Kumora of Manhattan, Kansas, is eager to suming an annual interest rate of 2 percent, what is enter the job market at an anticipated an- the present value of that stream of payments? (Hint: nual salary of $54,000. Assuming an aver- Use Appendix A.4 or the Garman/Forgue compan- age inflation rate of 3 percent and an equal DO IT IN CLASS ion website.) cost-of-living raise, what will his salary Page 19 4. Future Values. Using Table 1-1 on possibly become in ten years? In 20 years? (Hint: Use page 19, calculate the following: Appendix A.1.) To make real economic progress, how (a) The future value of lump-sum in- much of a raise (in dollars) does Chun need to receive vestment of $4,000 in four years that DO IT IN CLASS next year and the year after? carns 5 percent. Page 19 3. Present and Future Values. Megan Berry, a freshman horticulture major at the University of Minnesota, has (b) The future value of $1,500 saved each year for some financial questions for the next three years of three years that earns 6 percent. school and beyond. Answers to these questions can be (c) A person who invests $1,200 each year finds one obtained by using Appendix A or the Garman/Forque choice that is expected to pay 3 percent per year companion website. and another choice that may pay 4 percent. What (a) If Megan's tuition, fees, and expenditures for books is the difference in return if the investment is made this year total $22,000, what will they be during for four years? her senior year (three years from now), assuming (d) The amount a person would need to deposit today costs rise 4 percent annually? (Hint: Use Appendix with a 5 percent interest rate to have $2,000 in A.1 or the Garman/Forgus companion website.) three years. (b) Megan is applying for a scholarship currently valued 5. Using the present and future value tables in Appendix A, at $5,000. If she is awarded it at the end of next year, the appropriate calculations on the Garman/Forgue how much is the scholarship worth in today's dollars, companion website, or a financial calculator, calculate assuming inflation of 3 percent? (Hint: Use Appendix the following: A.2 or the German/Forgue companion website.) (a) The amount a person would need to deposit (c) Megan is already looking ahead to graduation today to be able to withdraw $6,000 each year and a job, and she wants to buy a new car not for ten years from an account carning long after her graduation. If after graduation 6 percent.(b) A person is offered a gift of $5,000 now or $8,000 7. Employee Benefits Decision. Ramon five years from now. If such funds could be ex- Alvarez, of Nome, Alaska, signed up for pected to earn 8 percent over the next five years, his employer's flexible spending account X which is the better choice? plan primarily because he can use the money to pay for unreimbursed medical DO IT IN CLASS (c) A person wants to have $3,000 available to spend Page 25 on an overseas trip four years from now. If such expenses for himself and his disabled son. funds could be expected to earn 6 percent, how Ramon is in the 15 percent marginal tax bracket, pays much should be invested in a lump sum to realize Social Security payroll taxes of 7.65 percent, and pays a 4 the $3,000 when needed? percent state income tax rate. How much will he save in income taxes by participating in the program this year in (d) A person invests $50,000 in an investment that the amount of $3,000? How much would Ramon save earns 6 percent. If $6,000 is withdrawn each year, if he was in the 25 percent federal marginal tax bracket? how many years will it take for the fund to run out? 8. Use the Rule of 72. Using the Rule of 72, calculate how 6. Inflation. Laureen Mauer's salary a year quickly $1,000 will double to $2,000 at interest rates of ago was $52,000. If inflation during the 2 percent, 4 percent, 6 percent, 8 percent, and 10 percent. year was 3.5 percent in Tampa where X she lives, how much of a decline in her 9. Use the Rule of 72. Based on the Rule of purchasing power occurred? Also, what DO IT IN CLASS 72 determine how long it would take to would be her purchasing power if deflation Page 12 double an investment of $5,000 if you of 1 percent occurred? could invest it at 7 percent. How long would it take to triple the investment? DO IT IN CLASS Page 21