i.
Whether given statement is true or not” Waiting for 5 years to start saving doubles what you deposit each year”.
Answer to Problem 125P
The statement is false.
Explanation of Solution
Given:
Retirement period from now: 40 years
Amount required: $ 2 M
Interest Rate = 10%.
Calculation:
If savings are done for amount S immediately:
If I start saving after 5 years later with annual saving being S, then:
Conclusion:
Since $7379.41 is much less than the double of $4518.33 (which is equal to $9036.66), the statement is false.
ii.
Whether required multiplier is higher or lower than 10% rate.
Answer to Problem 125P
Required multiplier is higher.
Explanation of Solution
Given:
Interest Rate = 12%
Retirement period from now: 40 years
Amount required: $ 2 M.
Calculation:
When interest rate is 12%
Required multiplier (FVIFA factor) =
Conclusion:
Required multiplier is higher.
iii.
Interest Rate.
Answer to Problem 125P
Interest rate is 0% or 14.78%.
Explanation of Solution
Given:
Savings are done of double amount after 5 years
Retirement period from now: 40 years
Amount required: $ 2 M.
Calculation:
Let required interest rate per year be R%
If 1+R = Z, then,
Solving this polynomial equation,
Conclusion:
R = 0% or R = 14.78%.
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Chapter 4 Solutions
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