Question Details

Joseph reads a lot about people who are success-oriented. He loves to learn about courage, risk-taking, and as he describes it, “the road less traveled.” His local bookstore has a large business section where he has found biographies of entrepreneurs and maverick corporate leaders. He also finds fascinating some of the books he has seen on financial planning and ways to accumulate wealth. One interesting savings plan he read about challenges the reader to put aside on full paycheck at the end of the year as a “holiday present to yourself”. Joseph had never thought about saving in that way, and wondered if it would really accumulate much savings.
 
1.	He decided to test the numbers by seeing how much money he would accumulate by a retirement age of 65 if he put on paycheck away the the end of each year. Right now that would mean depositing $1,000 at year end for the next 35 years. Assuming he makes one yearly deposit of $1,000 at 5% compounded annually, how much interest would he earn?
2.	Joseph was surprised at how large the sum would be and then realized that he would be able to put more money away in future years because most likely, his salary would go up. He also thought that he would invest the money over the long term at a higher interest rate, so he redid the calculations with a $1,500 annual year-end deposit, at 8% for 35 years. What was his result?
3.	Joseph was amazed at how much he could save in this manner and decided to design a detailed savings plan based on projected yearly increases. He realized that he would not start despising $1,500 now, but he would be able to deposit more than that in the future. If he were able to deposit $1,000 at the end of each year for 5 years at 8% compounded annually, $1,500 at the end of years 6-10 at 8% compounded annually, and $2,000 at the end of years 11-35 at 5% compounded annual, how much would he accumulate at the end of 35 years? Assume that any balances from earlier depositing periods would continue to earn the same rate of annual interest. Use the table for future value of annuities .
4.	By how much does the result differ from the amount calculated above for $1,500 deposited for 35 years? What accounts for the difference?
5.	If Joseph decided that ht wanted to have $300,000 accumulate in 30 years by making an annual payment at the end of each year that would earn 12% compounded annually, what would his sinking fund payment be? Use the appropriate table to determine the answer.
 
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