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Hello Sir,
I was trying a question on annuity and one question is not so clear:
Suppose you wish to retire forty years from today. You determine that you need $50,000 per year once you retire, with the first retirement funds withdrawn one year from the day you retire. You estimate that you will earn 6% per year on your retirement funds and that you will need funds up to and including your 25th birthday after retirement.
a) How much must you deposit in an account today so that you have enough funds for retirement?this one I used due annuity and my answer is 677517.88
b) How much must you deposit each year in an account, starting one year from today, so that you have enough funds for retirement?
the second one is bit confused how much I need to deposit each year starting from today.
I should first calculate the ordinary annuity then divide by 40?
I don’t know where you found this question, but the chances of it being asked in F2 are pretty small!!
For (a) you need to calculate the 25 year annuity factor at 6% and multiply it by the 40 normal discount factor at 6%. Then you apply the result to $50,000.
For (b) you divide your answer from (a) by the 40 year annuity factor at 6%.
(a) hence it will be 50000{1-1/(1+0.06)25/0.06}=639167.81
(b)639167.81/40=15979.20but for (b) I think it should be calculated X={1-1/(1+0.06)40/0.06}=639167.81 hence x is 42480.07 that need to be contributed for 40 year
this number is very tricky hence it very challenging to solved.
Part (a) is correct as far as you have gone, but 639167 then needs discounting for 40 years at 6% as I wrong before.
Are you studying for ACCA Paper F2, because a question like this would be very unlikely indeed!
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