Mary has
been working for a university for almost 25 years and is now approaching
retirement. She wants to address several financial issues before her retirement
and has asked you to help her resolve the situations below. Her assignment to
you is to provide a 4-5 page report, addressing each of the following issues
separately. You are to show all your calculations and provide a detailed
explanation for each issue. Issue A: For the last 19 years, Mary has been
depositing $500 in her savings account , which has earned 5% per year,
compounded annually and is expected to continue paying that amount. Mary will
make one more $500 deposit one year from today. If Mary closes the account
right after she makes the last deposit, how much will this account be worth at
that time? Issue B: Mary has been working at the university for 25 years, with
an excellent record of service. As a result, the board wants to reward her with
a bonus to her retirement package. They are offering her $75,000 a year for 20
years, starting one year from her retirement date and each year for 19 years
after that date. Mary would prefer a one-time payment the day after she
retires. What would this amount be if the appropriate interest rate is 7%?
Issue C: Mary’s replacement is unexpectedly hired away by another school, and
Mary is asked to stay in her position for another three years. The board
assumes the bonus should stay the same, but Mary knows the present value of her
bonus will change. What would be the present value of her deferred annuity?
Issue D: Mary wants to help pay for her granddaughter Beth’s education. She has
decided to pay for half of the tuition costs at State University, which are now
$11,000 per year. Tuition is expected to increase at a rate of 7% per year into
the foreseeable future. Beth just had her 12th birthday. Beth plans to start
college on her 18th birthday and finish in four years. Mary will make a deposit
today and continue making deposits each year until Beth starts college. The
account will earn 4% interest, compounded annually. How much must Mary’s
deposits be each year in order to pay half of Beth’s tuition at the beginning
of each school each year?
