What is the relationship between discounting and compounding

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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 inhertance by her late grandfather. Her trust fund is invested in 7% government bonds.

Questions

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?

5) List at least two actions that Emily and Paul could take to accumulate more of their retirement (think about i and n).

Reference no: EM131426377

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