8. Jimmy Wallingford, 30, earns $40,000 (before tax) this coming year, and he plans to spend...

 

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8. Jimmy Wallingford, 30, earns $40,000 (before tax) this coming year, and he plans to spend $25,000. He expects both his income and spending will increase at the rate of inflation, which is expected to be 2% per year. He plans to put his savings every year in a bank to earn 5% interest. Assuming that his average tax rate is 25% and his marginal tax rate is 30% every year, how much money will he have after 35 years? 11. You have just won a contest. The prize is a perpetuity that promises to pay $10,000 annually. If the interest rate is 8%, what is the value of your prize? Assume there is a provision in the contest agreement that allows for the payment to increase to compensate for inflationary pressures. If the inflation rate is expected to average 3% annually, what is the value of the prize? 8. Jimmy Wallingford, 30, earns $40,000 (before tax) this coming year, and he plans to spend $25,000. He expects both his income and spending will increase at the rate of inflation, which is expected to be 2% per year. He plans to put his savings every year in a bank to earn 5% interest. Assuming that his average tax rate is 25% and his marginal tax rate is 30% every year, how much money will he have after 35 years? 11. You have just won a contest. The prize is a perpetuity that promises to pay $10,000 annually. If the interest rate is 8%, what is the value of your prize? Assume there is a provision in the contest agreement that allows for the payment to increase to compensate for inflationary pressures. If the inflation rate is expected to average 3% annually, what is the value of the prize?