Question

Sarah Wiggum would like to make a single investment and have $2 million at the time of her retirement in 35 years. She has found a mutual fund that will earn 4 percent annually. How much will Sarah have to invest today? If sarah invests that amount and could earn a 14 percent annual return, how soon could she retire, assuming she is still going to retire when she has $2 million?

Answer 1

Information provided:

Future value= $2,000,000

Time= 35 years

Interest rate= 4%

The amount to be invested today is calculated by computing the present value.

Present value is computed by entering the below in a financial calculator:

FV= 2,000,000

N= 35

I/Y= 4

Press the CPT key and PV to compute the present value.

The value obtained is 506,830.94

Therefore, $506,830.94 needs to be invested today.

To compute the time for retirement is computed by entering the below in a financial calculator:

PV= -506,830.94

FV= 2,000,000

I/Y= 14

Press the CPT key and N to compute the present value.

The value obtained is 10.4761.

Therefore, she can retire in 10.48 years.

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