Question

Twins graduate from college together and start their careers. Twin 1 invests $2000 at the end of each year for 10 years only (until age 30) in an account that earns 7%, compounded annually. Suppose that twin 2 waits until turning 40 to begin investing. How much must twin 2 put aside at the end of each year for the next 25 years in an account that earns 7% compounded annually in order to have the same amount as twin 1 at the end of these 25 years (when they turn 65)? (Round your answer to the nearest cent.)

Answer 1

Twin 1

Information provided:

Yearly saving= $2,000

Interest rate= 7%

Time= 30 years - 10 years= 20 years

The question is solved by calcualting the future value.

Enter the below in a financial calculator to compute the future value:

PMT= 2,000

N= 20

I/Y= 7

Press the CPT key and FV to compute the future value.

The value obtained is 81,990.98.

Therefore, the value at the end of 30 years will be $81,990.98.

Twin 2

Information provided:

Future value= $81,990.98

Interest rate= 7%

Time= 65 years - 40 years= 25 years

The question is solved by calcualting the amount of yearly saving.

Enter the below in a financial calculator to compute the amount of yearly saving.

FV= 81,990.98

N= 25

I/Y= 7

future value.

The value obtained is 1,296.32.

Therefore, the amount of yearly saving should be $1,296.32.

In case of any query, kindly comment on the solution.