Question

James Johnson, a recent graduate of a nationally recognized MPA program wants to be able to travel around the world. James does not have enough money at this time, but believes he can save up enough money to travel around the world in ten years. If he currently has $10,000 to invest and estimates he can earn 7% compounded annually on his investment, how much must James put aside at the end of each of the next ten years in order to accumulate the $100,000 he anticipates will be needed to fulfill his dream?

What is the payment to be made?

Answer 1

Initial Investment (PV) = $ 10000

Tenure (NPER) = 10 years

RATE = 7% (Compounded Annually)

Future value of the above investment = FV(RATE,NPER,,-PV) = FV(7%,10,,-10000) = $19671.51

Amount need at the end of Ten years = $ 100000

Shortage = Amount Required - FV of Investment = $ 100000 - $ 19671.51 = $ 80328.49 (Balance FV required)

To accumulate this balance FV after ten years, James need to invest as below:

PMT(RATE%,NPER, ,-FV,0) = PMT(7%,10,,-80328.49,0) = $5813.98

James need to set aside and invest $ 5813.98 at the end of each of the ten years, to fill the gap for the total required amount.