You hire Susan for a three-year term. She has no retirement plan, so you agree to invest money immediately to allow her a stream of three payments beginning one year after her employment term ends. Draw a timeline! The money you invest for the full six years of this arrangement (three years of employment and three years of withdrawals) always earns 4% compounded annually. When Susan receives her third and last payment, the fund will be depleted and equal zero. The three payments she will receive are as follows: End of year 4: $25,000 End of year 5: $30,000 End of year 6: $37,000 Therefore, your goal is to have enough money in this account at the end of Susan’s three-year employment term to assure her of receiving these payments. How much money must you invest today to accomplish this strategy?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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You hire Susan for a three-year term. She has no retirement plan, so you agree to invest money immediately to allow her a stream of three payments beginning one year after her employment term ends. Draw a timeline! The money you invest for the full six years of this arrangement (three years of employment and three years of withdrawals) always earns 4% compounded annually. When Susan receives her third and last payment, the fund will be depleted and equal zero. The three payments she will receive are as follows:

 

End of year

 

4: $25,000 End of year

 

5: $30,000 End of year

 

6: $37,000

 

Therefore, your goal is to have enough money in this account at the end of Susan’s three-year employment term to assure her of receiving these payments. How much money must you invest today to accomplish this strategy?

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