Module 3 Practice Problems

Problem 3.1: At the beginning of 2016, the Westinghouse Air Brake Technologies Corporation (Wabtec) stock (NYSE: WAB) had a price of $63.16. At the end of 2020 it had a price of $73.20. Calculate the average annual return over this five-year period. (Ignore any potential dividend payment.)

Answer: 3%

Problem 3.2: You are currently 20 and plan to retire when you are 65. You want to have $5 million saved. You are depositing your money in a mutual fund that, over the long-run, earns 6% per year. How much do you need to contribute each month? How does this number change if you start saving at 30? 40? 50?

Answer: $1,814; $3,509; $7,215; $17,193

Problem 3.3: The Washington Group contributes to its employees 401(k) based on the following design: for every 2% deduction for the employee, the company will provide a 1% contribution, up to a 6% company contribution. Find the total contributions made to the retirement account for the following employees during a one-year period:

1.Al earned $92,000 per year and contributes 0% of his salary to his retirement account.
2.Basir earned $39,500 per year and contributes 10% of his salary to his retirement account.
3.Cynthia earned $102,500 per year and contributes 15% of her salary to her retirement account.
Answer: $0, $5,925; $21,525

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The Math of Money Copyright © by J. Zachary Klingensmith is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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