1. Joshua Vermier of Sacramento, California, received a raise after

1. Joshua Vermier of Sacramento, California, received a raise after his first year on the job to $43,800 from his initial salary of $42,000. What was Joshua’s raise stated as a percentage? Inflation averaged 2.8 percent for the year. What was his real income after the raise? What was his real raise stated as a percentage?
2. As a graduating senior, Chun Kumora of Manhattan, Kansas, is eager to enter the job market at an anticipated annual salary of $54,000. Assuming an average inflation rate of 3 percent and an equal cost-of-living raise, what will his salary be in ten years? In 20 years? To make real economic progress, how much of a raise (in dollars) does Chun need to receive next year and the year after?
3. Present and Future Values. Megan Berry, a freshman horticulture major at the University of Minnesota, has some financial questions for the next three years of school and beyond. Answers to these questions can be obtained by using Appendix A or the Garman/Forgue companion website.
(a) If Megan’s tuition, fees, and expenditures for books this year total $12,000, what will they be during her senior year (three years from now), assuming costs rise 4 percent annually?
(b) Megan is applying for a scholarship currently valued at $5000. If she is awarded it at the end of next year, how much is the scholarship worth in today’s dollars, assuming inflation of 3 percent?
(c) Megan is already looking ahead to graduation and a job, and she wants to buy a new car not long after her graduation. If after graduation she begins an investment program of $2400 per year in an investment yielding 6 percent, what will be the value of the fund after three years?
(d) Megan’s Aunt Karroll told her that she would give Megan $1000 at the end of each year for the next three years to help with her college expenses. Assuming an annual interest rate of 2 percent, what is the present value of that stream of payments?
4. Future Values. Using Table 1-1 on page 19, calculate the following:
(a) The future value of lump-sum investment of $4000 in four years that earns 5 percent.
(b) The future value of $1500 saved each year for three years that earns 6 percent.
(c) A person who invests $1200 each year finds one choice that is expected to pay 3 percent per year and another choice that may pay 5 percent. What is the difference in return if the investment is made for four years?
(d) The amount a person would need to deposit today with a 5 percent interest rate to have $2000 in three years.
5. Using the present and future value tables in Appendix A, the appropriate calculations on the Garman/Forgue companion website, or a financial calculator, calculate the following:
(a) The amount a person would need to deposit today to be able to withdraw $6000 each year for ten years from an account earning 6 percent.
(b) A person is offered a gift of $5000 now or $8000 five years from now. If such funds could be expected to earn 8 percent over the next five years, which is the better choice?
(c) A person wants to have $3000 available to spend on an overseas trip four years from now. If such funds could be expected to earn 7 percent, how much should be invested in a lump sum to realize the $3000 when needed?
(d) A person invests $50,000 in an investment that earns 6 percent. If $6000 is withdrawn each year, how many years will it take for the fund to run out?
6. Lauren Simpson’s salary a year ago was $42,000. If inflation during the year was 3.5 percent, how much of a decline in her purchasing power occurred?
Also, what would be her purchasing power if deflation of 1 percent occurred?
7. Ramon Alvarez signed up for his employer’s cafeteria plan primarily because he can use the money to pay for unreimbursed medical expenses for himself and his disabled son. Ramon is in the 15 percent marginal tax bracket, pays Social Security payroll taxes and pays a 4 percent state income tax rate. How much will he save in income taxes by participating in the program this year in the amount of $3000? How much would Ramon save if he was in the 25 percent federal marginal tax bracket?
8. Using the rule of 72, calculate how quickly $1000 will double to $2000 at interest rates of 2 percent, 4 percent, 6 percent, 8 percent, and 10 percent.
9. Based on the Rule of 72 determine how long it would take to double an investment of $5000 if you could invest it at 7 percent. How long would it take to triple the investment?

Future Value
Future value (FV) is the value of a current asset at a future date based on an assumed rate of growth. The future value (FV) is important to investors and financial planners as they use it to estimate how much an investment made today will be worth...


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