ME - Tutorial 3
1. You want to buy your dream car, but you are
$5,000 short. If you could invest your entire
savings of $2,350 at an annual interest of 12%,
how long would you have to wait until you have
accumulated enough money to buy the car?
2. How much do you have to invest today at an
annual rate of 8%, if you need to have $5,000 6
years from today?
3. You want to buy a house in 4 years and expect to
need $25,000 for a down payment. If you have
$15,000 to invest, how much interest do you
have to earn (compounded annually) to reach
your goal?
4. You are planning your retirement and you come
to the conclusion that you need to have saved
$1,250,000 in 30 years. You can invest into an
retirement account that guarantees you a 5%
annual return. How much do you have to put
into your account at the end of each year to
reach your retirement goal?
5. Your great-uncle Claude is 82 years old. Over the
years, he has accumulated savings of $80,000.
He estimates that he will live another 10 years at
the most and wants to spend his savings by then.
(If he lives longer than that, he figures you will
be happy to take care of him.) Uncle Claude
places his $80,000 into an account earning 10
percent annually and sets it up in such a way
that he will be making 10 equal annual
withdrawals (the first one occurring 1 year from
now) such that his account balance will be zero
at the end of 10 years. How much will he be able
to withdraw each year?
6. Assume it is now January 1, 2000, and someone
offers the following deal: starting from year
2000, you will be paid each year the amount of
dollars equal to the year, i.e., $2000, $2001,
$2002, .... until year 3000 inclusive. If payments
occur at the year end and the interest rate
remains at 10%, what is the PV of such a deal?
What is the PV if the payments covers only the
years from 2000 to 2050 inclusive? What can you
conclude for the comparison?
ME - Tutorial 3
1. You want to buy your dream car, but you are
$5,000 short. If you could invest your entire
savings of $2,350 at an annual interest of 12%,
how long would you have to wait until you have
accumulated enough money to buy the car?
2. How much do you have to invest today at an
annual rate of 8%, if you need to have $5,000 6
years from today?
3. You want to buy a house in 4 years and expect to
need $25,000 for a down payment. If you have
$15,000 to invest, how much interest do you
have to earn (compounded annually) to reach
your goal?
4. You are planning your retirement and you come
to the conclusion that you need to have saved
$1,250,000 in 30 years. You can invest into an
retirement account that guarantees you a 5%
annual return. How much do you have to put
into your account at the end of each year to
reach your retirement goal?
5. Your great-uncle Claude is 82 years old. Over the
years, he has accumulated savings of $80,000.
He estimates that he will live another 10 years at
the most and wants to spend his savings by then.
(If he lives longer than that, he figures you will
be happy to take care of him.) Uncle Claude
places his $80,000 into an account earning 10
percent annually and sets it up in such a way
that he will be making 10 equal annual
withdrawals (the first one occurring 1 year from
now) such that his account balance will be zero
at the end of 10 years. How much will he be able
to withdraw each year?
6. Assume it is now January 1, 2000, and someone
offers the following deal: starting from year
2000, you will be paid each year the amount of
dollars equal to the year, i.e., $2000, $2001,
$2002, .... until year 3000 inclusive. If payments
occur at the year end and the interest rate
remains at 10%, what is the PV of such a deal?
What is the PV if the payments covers only the
years from 2000 to 2050 inclusive? What can you
conclude for the comparison?
 Tut 3 Solution
Solution 1
6.66 yrs

Solution 2
$3,150.85

Solution 3
13.62%

Solution 4
$18,814.30

Solution 5

Solution 6