Financial Concepts

Unit 1 IP Ð'- Organizing and Managing Your Financial Resources

Professor Watson

October 7, 2006

a) Joe won a lottery jackpot that will pay him $12,000 each year for the next ten years. If the market interest rates are currently 12%, how much does the lottery have to invest today to pay out this prize to Joe over the next ten years?

The amount to be deposited is the present value of the payments. The payments are in the form of an annuity and the present value can be found using the PVIFA table. For 10 years and 12%, the factor is 5.650. The amount to be deposited today is: $12,000 x 5.650 = $67,800

b) Mary just deposited $33,000 in an account paying 10% interest. She plans to leave the money in this account for seven years. How much will she have in the account at the end of the seventh year?

The amount at the end of 7 years will be $64,308.

Savings Calculator

Your savings is worth $64,308 after 7 years.

If you save $0 per month your savings may grow to $64,308 after 7 years. This includes a starting balance of $33,000 and a 10.00% annual rate of return.

Results Summary

Starting amount $33,000

Years 7

Additional contributions $0 per month

Rate of return 10.00% compounded annually

Total amount you will have contributed $33,000

Total at end of investment $64,308

Savings Balance by Year

________________________________________

Year Additions Interest Balance

Start $33,000 $33,000

1 $0 $3,300 $36,300

2 $0 $3,630 $39,930

3 $0 $3,993 $43,923