FINANCE: 2. Suppose you want to have $800,000 for retirement in 20 years. Your account earns...

FINANCE:

Suppose you want to have $800,000 for retirement in 20 years. Your account earns 7% interest.

a) How much would you need to deposit in the account each month?

$

b) How much interest will you earn?

$

c) Suppose you waited 10 years to invest in the same retirement fund and have the same $800,000 for retirement at the same 7% interest. What amount will you have to deposit each month to match the value of your annuity?

$

d) Which investment plan is better and why?

Solutions

Expert Solution

a) Monthly interest rate, r = 7%/12 = 0.005833333333

Number of monthly payments, n = 20 * 12 = 240

Monthly deposit required = $1,535.7248183392

b) The amount of interest = 800,000 - Monthly payment * Number of payments

The amount of interest = 800,000 - 1,535.7248183392 * 240

The amount of interest = $431,426.043598592

c) If we wait for 10 years, number of monthly payments, n = 10 * 12 = 120

r = 7%/12 = 0.005833333333

Monthly deposit required = $4,622.0116709978

d) Investing for 20 years is better because the monthly deposit is lower and we earn a larger portion of interest

jeff jeffy answered 1 year ago

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