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Chapter 6: Q9Q (page 301)
Question:What are the primary characteristics of an annuity? Differentiate between an “ordinary annuity” and an “annuity due.”
The annuity has periodic payment and rents occur in beginning in annuities due, rents occur at end of the period in an ordinary annuity
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You have been hired as a benefit consultant by Jean Honore, the owner of Attic Angels. She wants to establish a retirement plan for herself and her three employees. Jean has provided the following information. The retirement plan is to be based upon annual salary for the last year before retirement and is to provide 50% of Jean’s last-year annual salary and 40% of the last-year annual salary for each employee. The plan will make annual payments at the beginning of each year for 20 years from the date of retirement. Jean wishes to fund the plan by making 15 annual deposits beginning January 1, 2017. Invested funds will earn 12% compounded annually. Information about plan participants as of January 1, 2017, is as follows.
Jean Honore, owner: Current annual salary of \(48,000; estimated retirement date January 1, 2042.
Colin Davis, flower arranger: Current annual salary of \)36,000; estimated retirement date January 1, 2047.
Anita Baker, sales clerk: Current annual salary of \(18,000; estimated retirement date January 1, 2037.
Gavin Bryars, part-time bookkeeper: Current annual salary of \)15,000; estimated retirement date January 1, 2032.
In the past, Jean has given herself and each employee a year-end salary increase of 4%. Jean plans to continue this policy in the future.
Instructions
(a) Based upon the above information, what will be the annual retirement benefit for each plan participant? (Round to the nearest dollar.) (Hint: Jean will receive raises for 24 years.)
(b) What amount must be on deposit at the end of 15 years to ensure that all benefits will be paid? (Round to the nearest dollar.)
(c) What is the amount of each annual deposit Jean must make to the retirement plan?
Consider the following independent situations. (a) Mike Finley wishes to become a millionaire. His money market fund has a balance of \(92,296 and has a guaranteed interest rate of 10%. How many years must Mike leave that balance in the fund in order to get his desired \)1,000,000? (b) Assume that Sally Williams desires to accumulate \(1 million in 15 years using her money market fund balance of \)182,696. At what interest rate must Sally’s investment compound annually?
Consolidated Natural Gas Company (CNG), with corporate headquarters in Pittsburgh, Pennsylvania, is one of the largest producers, transporters, distributors, and marketers of natural gas in North America.
Periodically, the company experiences a decrease in the value of its gas- and oil-producing properties, and a special charge to income was recorded in order to reduce the carrying value of those assets.
Assume the following information. In 2016, CNG estimated the cash inflows from its oil- and gas-producing properties to be \(375,000 per year. During 2017, the write-downs described above caused the estimate to be decreased to \)275,000 per year. Production costs (cash outflows) associated with all these properties were estimated to be \(125,000 per year in 2016, but this amount was revised to \)155,000 per year in 2017.
Instructions (Assume that all cash flows occur at the end of the year.)
(a) Calculate the present value of net cash flows for 2016–2018 (three years), using the 2016 estimates and a 10% discount factor.
(b) Calculate the present value of net cash flows for 2017–2019 (three years), using the 2017 estimates and a 10% discount factor.
(c) Compare the results using the two estimates. Is information on future cash flows from oil- and gas-producing properties useful, considering that the estimates must be revised each year? Explain.
Tony Bautista needs $25,000 in 4 years. What amount must he invest today if his investment earns 12% compounded annually? What amount must he invest if his investment earns 12% annual interest compounded quarterly?
Question:The Kellys are planning for a retirement home. They estimate they will need $200,000 4 years from now to purchase this home. Assuming an interest rate of 10%, what amount must be deposited at the end of each of the 4 years to fund the home price? (Round to two decimal places.)
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