Question

Don wants to accumulate $55,000 in today's dollar terms in the next 6 years. He expects to earn a return of 6.5% per year and inflation is expected to be 1.5%. How much should be the serial payment in the 4th year so that Don can achieve the target?

		$8471
		$8598
		$7195
		$8727

Answer 1

Accumulated Value in Today's dollar amount = $ 55000

We will use inflation rate to compute the Accumulated value in the end of 6th year,

= 55000(1+0.015)^6

= $ 60.139.38

So, $ 60,139.38 will be the Future value in 6th year in that period dollar term.

Now, we will calculate the Initial Periodic periodic payment using the Future Value of Growing Annuity:-

Where, C= Periodic Payments

r = Periodic Interest rate = 0.065

g = Inflaton rate = 0.015

n= no of periods = 6

Future vAlue = $60139.38

C = $ 8222.52

So, the First periodic payment will be $ 8222.52

Now, Since each year Inflation will grow the further payment, we will use Inflation rate to calculate the 4th payment in the Serial Payments flow:-

So, the 4th payment will be $ 8598

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