# Home Essay

Topics: Employment, Time value of money, Time Pages: 7 (1716 words) Published: May 31, 2013
Asif abdul salam
ID-222534
Home work Assignment 2
Week Two Homework Assignment Chapter 2 Financial Planning Problems- Page 56 : 1,2,3,4,5,6. Q1) Determining the Future Value of Education. Jenny Franklin estimates that as a result of completing her master’s degree, she will earn \$6,000 a year more for the next 40 years. [a] .What would be the total amount of these additional earnings? Answer . 1[a] \$6,000 × 40

= \$ 240,000
Therefore, The total additional earnings of jenny franklin = \$ 240,000. ……………………………………………………………………….. [b] What would be the present value of these additional earnings based on an annual interest rate of 6% ? (Use Table A-4 in Appendix A) Answer . 1[b] From the present value table, the present value of \$1 at 6% for the next 40 years will be 0.097 Therefore the present value based on an annual rate of interest of 6% is Present Value (PV) =Future Value (FV) × Present Value Interest Factor (PVIF) PV = \$ 240,000 × 0.097 = \$ 23,280

………………………………………………………………………………………… Q2) Comparing Living Costs. Brad Edwards is earning \$ 42,000 a year in a city located in the Midwest. He is interviewing for a position in a city with a cost of living 12 percent higher than where he currently lives. What would be the minimum salary he would need at his job to maintain the same standard of living ?

Answer. [2] \$100 is the cost of living index currently, Brad Edward earns \$42,000 in a city located in the Midwest. In New city cost of living increases by 12%, the new index rate is 112 The minimum amount Mr. Edward must earn if he prefers to take up a job in the new city will be.. Buying power = The index number of the new city × salary Let X be the buying power.

X= [112 × 42,000]/ 100
x= 47,04,000 /100
x = \$47,040
Therefore, Brad Edward should maintain at least \$47,040 to maintain the same standard of living of city in Midwest. …………………………………………………………………………..

Q3) Calculating Future Value of Salary. During a job interview, Pan Thompson is offered a salary of \$ 23,000. The company gives annual raises of 6 percent. What would be Pam’s salary during her fifth year on the job?

Answer [3]:- future value table, @ 6% interest rate, \$1 will amount equals to 1.262 at the end of 4 years.
Therefore, Pam Thompson in the fifth year will be -

\$23,000 × 1.262 = \$29,026

by formula,
A = P (1 + i) n

= 23,000 (1 + .06)4
= 23,000 (1.06)4
= 23000 × 1.262
= \$29,026

Where,
A= Annuity
P = Principle
I = interest rate
n = number of time periods

Q4) Computing Future Value. Calculate the future value of a retirement account in which you deposit \$2,000 a year for 30 years with an annual interest rate of 8 percent. ?
Answer. [4] From the future value table of annuity, the future value of \$1 for 30 years at 8% is 113.280.
So, the future value of retirement a/c in which deposit \$2000/year for 30 years with annual interest rate 8% will be :-
Future Value (FV) = Present Value (PV) × Future Value Interest Factor (FVIF)
= \$2,000 × 113.280
= \$ 226,560

……………………………………………………………………………………………………….
Q5) Computing Taxes for Employee Benefits. Which of the following employee benefits has the greater value? Use the formula given in the Financial Planning Calculations box on page 52 to compare these benefits (Assume a 28 percent tax rate)

[a] A nontaxable pension contribution of \$4300 or the use of a company car with a taxable value of \$6,325.
Value of the Benefit /1- Tax rate
Nontaxable pension contribution= \$4300
Nontaxable pension contribution...