Question

Gretchen wants to take the next six years off work to travel around the world. She estimates her annual cash needs at $29,000 (if she needs more, she will work odd jobs). Gretchen believes she can invest her savings at 10% until she depletes her funds.

Requirements:

1. How much money does Gretchen need now to fund her travels?

2. After speaking with a number of banks, Gretchen learns she will only be able to invest her funds at 6%. How much does she need now to fund her travels?

Answer 1

1.

To find out how much money she requires now to fund her travels, we need to find out the present value of $ 29,000 each year for the next 6 years

Year	Amount	PV Factor	Present Value
		1 / (1 + 10%)^Year
1	$ 29,000.00	0.909	$      26,363.64
2	$ 29,000.00	0.826	$      23,966.94
3	$ 29,000.00	0.751	$      21,788.13
4	$ 29,000.00	0.683	$      19,807.39
5	$ 29,000.00	0.621	$      18,006.72
6	$ 29,000.00	0.564	$      16,369.74
			$    126,302.56

2. If interest rate is 6%

Year	Amount	PV Factor	Present Value
		1 / (1 + 6%)^Year
1	$ 29,000.00	0.943	$      27,358.49
2	$ 29,000.00	0.890	$      25,809.90
3	$ 29,000.00	0.840	$      24,348.96
4	$ 29,000.00	0.792	$      22,970.72
5	$ 29,000.00	0.747	$      21,670.49
6	$ 29,000.00	0.705	$      20,443.86
			$    142,602.41