Question

(Present value) Sarah Wiggum would like to make a single investment and have

$1.6

million at the time of her retirement in

28

years. She has found a mutual fund that will earn

5

percent annually. How much will Sarah have to invest today? If Sarah earned an annual return of

17

percent, how soon could she then retire?

a. If Sarah can earn

5

percent annually for the next

28

years, the amount of money she will have to invest today is

$nothing.

(Round to the nearest cent.)

Answer #1

a.Present value=1,600,000*Present value of discounting factor(rate%,time period)

=1,600,000/1.05^28

=1,600,000*0.255093637

**=$408149.82(Approx)**

b.We use the formula:

A=P(1+r/100)^n

where

A=future value

P=present value

r=rate of interest

n=time period.

1,600,000=408149.82*(1.17)^n

(1,600,000/408149.82)=(1.17)^n

Taking log on both sides;

log (1,600,000/408149.82)=n*log 1.17

n=log (1,600,000/408149.82)/log 1.17

**=8.70 years(Approx)**

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