Assume that 25 years ago your dad invested $200,000, plus $25,000 in years 2 through 5, and $40,000 per year from year 6 on ward. At a very good interest rate of 12% per year, determine (a) the CC value, and (b) the annual retirement amount that he can withdraw forever starting next year (year 26), if no additional investments are made.
What will be an ideal response?
(a) CC = -200,000 – 25,000(P/A,12%,4)(P/F,12%,1) – (40,000/0.12)(P/F,12%,5)
= -200,000 – 25,000(3.0373)(0.8929) – (40,000/0.12)(0.5674)
= $-456,933
(b) Find future value in year 25 and multiply by i
A = F25 × i
= [200,000(F/P,12%,25) + 25,000(F/A,12%,4)(F/P,12%,20) + 40,000(F/A,12%,19)](0.12)
= [200,000(17.0001) + 25,000(4.7793)(9.6463) + 40,000(63.4397)](0.12)
= 7,090,172(0.12)
= $850,821 per year (forever)
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