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For each of the following exercises you will receive 20% of the corresponding points for providing the correct formula, 40% of the corresponding points for
For each of the following exercises you will receive 20% of the corresponding points for providing the correct formula, 40% of the corresponding points for showing the procedure, and 40% of the corresponding points for having the correct answer. The maximum amount of points that can be earned in each problem varies and it depends on level of difficulty and length of each problem.
- Kraft Foods executives have fifteen thousand dollars placed in their 401K retirement program at the end of each year as part of their compensation. John Trump has worked for Kraft for twenty-five years and his 401K plan has had an average annual return of 10% per year.
- What is the total value of Trumps 401K account? (Points: 15)
- Trump retires at the end of his twenty-fifth year and begins withdrawing from the account. He expects to live another twenty years. If the account continues to earn 10% while funds are still on deposit, how much will each annual withdrawal (as an ordinary annuity) be? Hint: Part (b) is asking you to compute PMT. (Points: 15)
- Trump wants to leave one million dollars to his nephew when he dies in twenty years. If the account still earns 10%, how much will he be able to withdraw each year and still leave the desired inheritance in twenty years, assuming he dies on schedule? Hint: First, compute the present value of one million dollars today (twenty years before he dies). (Points: 15) Second, take that amount off the balance of his 401K account today (which you computed in Part (a)). (Points: 10) Third, recalculate how much he will be able to withdraw each year (which you computed in Part (b)). (Points: 15)
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