Question

Your clients want to have $10,000 at the end of each of the next 2 years and $25,000 at the end of the third year for travel. They wish to use a lump sum of assets in order to accomplish this goal. What amount must be deposited in an account that earns 7% annually?

NEXT PART: Assume your clients in the previous problem have 40,000 to invest. What average annual rate of return would they have to earn on their investment in order to achieve their goals?

Answer 1

Rate of return is 7% annually. it means compounded annually.So if we invest $ X at day 1 we will get $ 1.07 X at end of year 1 which will get accumulated and from this we will pay $10,000 .

Now we will have balance of investment equal to ($1.07X-$10,000)which will earn interest of 7%. So investment will have balance of [($1.07X-$10,000)1.07] before withdrawing $10,000 at end of year 2.

Amount to be invested for year 3 will be{ [($1.07X-$10,000)1.07]-$10,000}

So at end of 3 year, investment balance should be $25,000 i.e requirement of 3rd year