Question

Financial planning case 2-2

Victor Hernandez Considers a Career Change

Victor is somewhat satisfied with his sales career and has always wondered about a career as a teacher in a public school. He would have to take a year off work to go back to college to obtain his teaching certificate, and that would mean giving up his $40,000 salary for a year. Victor expects that he could earn about the same income as a teacher. Round your answers to the nearest dollar.

What would his annual income be after 12 years as a teacher if he received an average 4 percent raise every year? Round Future Value of a Single Amount in intermediate calculations to four decimal places. (Hint: Use Appendix A-1.)
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Victor also could earn $3,000 each year teaching during the summers. What is the accumulated future value of earning those annual amounts over 12 years assuming a 5 percent raise every year? Round Future Value of a Series of Equal Amounts in intermediate calculations to four decimal places. (Hint: Use Appendix A-3.)
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Answer 1

Answer: Victor's annual income after 12 years as a teacher would be $47,564 if he received an average 4 percent raise every year.

The accumulated future value of earning $3,000 each year teaching during the summers over 12 years with a 5 percent raise every year would be $41,592.

Explanation:

To calculate Victor's annual income after 12 years as a teacher, we need to find the future value of his starting salary of $40,000 after 12 years with an average 4 percent raise every year.

Using the formula for the future value of a single amount (FV = PV * (1 + r)^n), where PV is the present value, r is the interest rate, and n is the number of years, we can calculate the future value as follows:

FV = $40,000 * (1 + 0.04)^12 = $47,564

So, Victor's annual income after 12 years as a teacher would be $47,564 if he received an average 4 percent raise every year.

To calculate the accumulated future value of earning $3,000 each year teaching during the summers over 12 years with a 5 percent raise every year, we need to use the formula for the future value of a series of equal amounts (FV = A * (1 + r)^n - 1 / r), where A is the annual payment and r is the interest rate.

Plugging in the values, we get:

FV = $3,000 * (1 + 0.05)^12 - 1 / 0.05 = $41,592

So, the accumulated future value of earning $3,000 each year teaching during the summers over 12 years with a 5 percent raise every year would be $41,592.