Question

Mark saves a fixed percentage of his salary at the end of each year. This year...

Mark saves a fixed percentage of his salary at the end of each year. This year he saved $ 1486. For the coming years, he expects his salary to increase at an 8% annual rate, and he plans to increase his savings at the same 8% annual rate. He invests his money in the stock market. There thus will be 7 end of year investments. Solve the problem by using the geometric gradient factor.

How much will the investment be worth at the end of that period if they increase in the stock market at an 8% annual rate? The answer is close to...

Need help with the formula or the tables thanks.

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Answer:

Given information

Savings in the first year = 1,486

Time period = 7 years

Increase in the savings = 8%

Rate of interest = 8%

How much will be investment at the end of 7 years, if the increase is 8%?

This a geometric gradient cash flow. To calculate the future worth of the geometric gradient cash flow, we have to first calculate the present worth.

If the gradient percentage increase is equal to the rate of interest, we have to use the following formula to calculate the present worth.

PW = A1 [N ÷ (1 + i)]

PW = 1,486 [7 ÷ (1 + 0.08)]

PW = 9631.48

After calculating the PW, now we can able to calculate the future worth of the investment at the end of 7 years.

Future Worth = 9631.48(1 + 0.08) 7 = 16506.66 ~ 16506.67

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