Question

Doug wants to go on vacation to Disneyland with his family every 5 years. He figures that travel costs today are $3,000 for all expenses associated with the trip, and he expects these costs to increase with inflation. Assume inflation is 2%, compound quarterly. He wants to take his family on their next Disneyland trip in exactly 5 years, and he wants to do these trips for the next 50 years. If he can earn 6.6% APR, compounded monthly, on his investments. How much would Doug need to invest today in order to pay for the next 50 years of Disneyland trips?

Answer 1

Doug needs to invest $10,463.53 today to pay his Disneyland trips for next 50 years.

Step 1: Calculating effective annual inflation rate and effect APR.

Step 2: Computing inflation adjusted vacation costs for every 5 years.

Step 3: Computing PV of vacation costs incurred at the effective APR rate of 6.8%

Step 4: Sum up col: PV of vacation costs incurred = $10,463.53 which is the amount which Doug needs to invest today in order to finance his vacations for next 50 years.