Question

FINDING THE REQUIRED INTEREST RATE

Your parents will retire in 17 years. They currently have $380,000 saved, and they think they will need $1,950,000 at retirement. What annual interest rate must they earn to reach their goal, assuming they don't save any additional funds? Round your answer to two decimal places.

%

Answer 1

REQUIRED INTEREST RATE = 10.10%

Here we have to calculate the interest rate at which $380,000 will become $19,50,000 at the end of 17 Years

Future Value = $19,50,000

Present Value = $380,000

Period = 17 Years

Future Value = Present Value x Future Value Factor

$19,50,000 = $380,000 x [ 1 + r ]¹⁷

[ 1 + r ]¹⁷ = $19,50,000 / 380,000

[ 1 + r ]¹⁷= 5.13158

From the Future Value Factor Table, We can find that the rate corresponding to the factor for 5.13158 for 17 years is approximately 10.10%

If today we invest $380,000.00 at a rate of 10.10%, you can have $19,50,000 at the end of 17 Years