Class Discussion – Time Value of Money in Investment (recap)
1. Jack deposits a sum of money for four years at a fixed rate of compound interest. After three
years the amount in the account is RM 92,610, and after four years the amount in the account is
RM 97,240.50. Calculate:
i) The annual rate of compounding.
ii) The original sum deposited.
iii) The interest on the account after the first year.
2. You wish to retire in 30 years. Currently, your retirement fund has $50,000 in a savings account
yielding 5% annually and $100,000 quality stocks yielding 10% annually. Furthermore, you expect
to add $10,000 to the savings account and $10,000 to your stock portfolios at the end of each
year.
Calculate how much you will have in your retirement fund when you retire.
3. You are planning for a retirement by considering compounding effect of annual return.
i) How much will you have if you start to invest RM 100,000 today for the next 25 years at an
expected return of 12% per year?
ii) You have RM 100,000 in an investment account today. You wish to retire in 25 years with a
total amount of RM 3,000,000 in the investment account. Assuming you do not save any
additional fund throughout these 25 years, what annual rate of return must you earn to
reach this goal?
How many years do you need if your return is 12% p.a.?
iii) You have RM 100,000 in an investment account today, and you plan to deposit an
additional RM 30,000 at the end of every future year until your account totals RM
3,000,000. You expected to earn 12% annually on the account. How many years will it take
to reach you goal?
4. John has already saved $40,000 in an investment account and expected to receive additional
$12,000 each at the end of the next two years. He also expects to pay $30,000 each at the end of
Year 2 and Year 3 for his son’s university education. How much he does afford to spend now on
vacation if he expects to earn 7% interest rate from his investments?
5. Sophia is opening a retirement account at a bank. Her goal is to accumulate $1,000,000 in the
account by the time she retires in 25 years. A local bank is willing to open a retirement account
that pays 8% interest compounded annually throughout the 25 years. Her annual current salary is
$180,000 and she expects that her annual income will increase 5% next year. She wishes to start
with a deposit which is equal to 10% of her new salary, and maintain the same deposit thereafter.
The first deposit will occur at the end of year 1, and subsequent deposits will be made at the end
of each year. The last deposit will be made at the end of year 25.
i) Calculate the size of her first deposit.
ii) Calculate the accumulated amount she will have at the end of year 25.
iii) How much will the accumulated sum calculated in Part (ii) amount to the account
immediately after she makes the first and second planned withdrawals of $20,000 per year at
the end of year 26 and at the end of year 27?
