Question

Your sister just deposited $10,500 into an investment account. She believes that she will earn an annual return of 9.8 percent for the next 5 years. You believe that you will only be able to earn an annual return of 9.2 percent over the same period. How much more must you deposit today in order to have the same amount as your sister in 5 years?

Answer 1

First we have to calculate the future value of sister's investment account balance

Future value = 10,500 × (1 + 0.098)⁵ =$ 16,757.18

In both investment account the value at the end of the 5 years should be $ 16,757.18

So now we should calculate the present value of $16,757.18 at 9.2% to know the amount to be deposited today

Present value = 16,757/(1+0.092)⁵ = $10,791.65

The extra amount to deposit today is

=$(10791.65 - 10,500)

= $291.65

The extra amount to be deposited today to have same amount at the end of 5 years is $ 291.65

Note ÷

As nothing mentioned in the question for rounding off , the figures are rounded to 2 decimals.

answered by: anonymous