PRACTICAL APPLICATION PROBLEM 1                                                                                  

This problem is worth 10% of your term grade. Note that there is a numeric (problem solving) component as well as an essay question. All parts must be completed successfully for full credit. The problem section is worth 20 out of 30 points and the essay section is worth 10 out of the 30 point total.

Planning for retirement is vital to most individuals. Social Security is a good idea, but it is in danger of running short of funds in the coming years. This problem is structured to help you think about how to save for the future. As with many time value of money problems, you may still need to draw a time line. Note the following requirements for this problem.

  1. Answer each of the questions below as directed and submit this file to the assignment folder. Rename the file with your first and last name and Problem 1. (such as: Your Name Problem 1)
  2. You must “show your work”. That means, for every calculation, show the inputs you used on the calculator: N (# periods)= ??, I/Y (rate) = ??, PV = ??, PMT = ?? And FV = ?? In TVM problems, you must have 4 of the 5 values, solving for the 5th. Zero is often a valid value and where appropriate, show this. For example, on a monthly mortgage, you owe an amount, and this is the PV, you pay off in x periods (# years * 12), which is N, you have a periodic interest rate, that is annual rate/12, and you owe nothing at the end (FV = 0). You are then solving for PMT.

A correct answer with no work shown is scored as a 50%. An incorrect answer with no work shown is scored as 0%.

Incorrect answers with work shown will receive at least some partial credit.

  1. Clearly indicate your final answer for each section. Make it easy for your academic coaches to grade the assignment please.


Your best friend Dave just celebrated his 24th birthday and wants to start saving for his anticipated retirement. Dave plans to retire in 36 years and believes that he will have 25 good years of retirement and believes that if he can withdraw $125,000 at the end of each year, he can enjoy his retirement. Assume that a reasonable rate of interest for Dave for all scenarios presented below is 6.5% per year.

This is an annual rate, review each individual question for more specifics on compounding periods per year.

Because Dave is planning ahead, the first withdrawal will not take place until one year after he retires. He wants to make equal annual deposits into his account for his retirement fund.

For each question, add blank lines as needed to provide your solution.

  1. If he starts making these deposits in one year and makes his last deposit on the day he retires, what amount must he deposit annually to be able to make the desired withdrawals at retirement?

A1) First: Amount needed at retirement (3 pts):


A2) The amount Dave must save each year (beginning at the end of the first year) to fund his retirement is (3 pts):

A3) If Dave decides to make monthly deposits to reach his same retirement goal, how much must Dave start depositing one month from today? (3 pts)?

  1. If Dave decides instead to take exotic vacations each year for the next 5 years, and delay putting aside funds for that time, (1st deposit at the end of 5 years from now, leaving only 31 years to grow his retirement nest egg), what amount must he deposit annually to be able to make the desired withdrawals at retirement (4 pts)?


  1. We are now back to Dave starting his retirement investments one year from now. Suppose your friend has just inherited a large sum of money. Rather than making equal annual payments for the entire investment period , he has decided to make one lump sum deposit today to cover his retirement needs. What amount does he have to deposit today? (3 pts)


  1. We are now back to Dave starting his retirement investments one year from now (36 years to retirement). Suppose Dave’s employer will contribute $2,500 to the account each year as part of the company’s profit sharing plan. In addition, assume that Dave has a trust fund that will pay out $50,000 to him when he is 40 (16 years from now). What amount must he deposit annually under these assumptions to be able to make the desired withdrawals at retirement?

To find the amount of the annual deposit now, it is easier to break down the components of the problem. Doing so for each of the following to find your friend’s annual deposit, we get:

D1) Value of employer’s contribution at retirement (1 pt):



D2) Value of trust fund at retirement (1 pt):



D3) Remaining amount that Dave needs at retirement (1 pt):



D4) (Final answer) Amount to save each year under these assumptions (1):






There are obvious simplifications in this problem, making it unreasonable in “real life”. Begin by discussing how economic conditions, chosen investment vehicles (FDIC insured investments, mutual funds, stock markets, etc.), diversification (e.g., invest all in Tesla or go with index funds), rates of return, and inflation will affect retirement planning. What are some ways that those saving for retirement can help address the key issues you have discussed? Be sure to address both parts of this question.

Read the Rubric for essay section (below). The essay section is worth 10 out of the assignment’s 30 point (max) total.


Rubric for the essay section:

  • Answer provides enough depth to cover the topic (250 words minimum).
  • Response is well written and free from writing errors (grammar, punctuation, sentence structure, spelling, etc.)
  • APA citation for sources provided (with a minimum of 1 reference, but no more than 5 references). The sources are of high quality (books, journal articles, reputable business magazines, professional association publications, government websites etc.). INVESTOPEDIA (OR WIKIPEDIA) is not considered a proper reference.


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