Emily Dao, 27, just received a promotion at work that increased her annual salary to $37,000. She is eligible to participate in her employers' 401(k) plan to which the employer matches dollar-for-dollar workers contributions up to 5% of salary. However, Emily wants to buy a new $25,000 car in three years and she wants to have enough money to make a $7,000 down payment on the car and finance the balance. Fortunately, she expects a sizable bonus this year that she hopes will cover that down payment in three years.

Also in her plans is a wedding. Emily and her boyfriend, Paul, have set a wedding date two years in the future after he finishes medical school. In addition, Emily and Paul want to buy a home of their own as soon as possible. This might be possible because, at age 30, Emily will be eligible to access $50,000 trust fund left to her as an inheritance by her late grandfather. Her trust fund is invested in 7% government bonds.

1) Justify Emily's participation in her employer's 401(k) plan using the time value of money concepts by explaining how much an investment of $10,000 will grow to in 40 years if it earns 10%

2) Calculate the amount of money that Emily needs to set aside from her bonus this year to cover the down payment on a new car, assuming she can earn 6% on her savings. What if she could earn 10% on her savings?

3)What will be the value of Emily's trust fund at age 60, assuming she takes possession of half of the money ($25,000 of the $50,000 trust fund) at age 30 for a house down payment and leaves the other half of the money untouched where it is currently invested?

4) What is the relationship between discounting and compounding?

Answer rating: 100% (QA)

1 The needs of emily are Car Wedding House The down payment of car can be paid throgh the amount ... View the full answer