Question

Michael Jones is saving for an Australian vacation in three years. He estimates that he will need $5,340 to cover his airfare and all other expenses for a week-long holiday in Australia. If he can invest his money in an S&P 500 equity index fund that is expected to earn an average annual return of 10.6 percent over the next three years, how much will he have to save every year if he starts saving at the end of this year? (Round factor values to 4 decimal places, e.g. 1.5212 and final answer to 2 decimal places, e.g. 15.25.)

Answer 1

Amount needed to have for vacation or Future Value of amount saved = 5340

Investment return rate per year (I)= 10.6%

Number of years (n)= 3

Amount required to save each period Formula = Future value*i/(((1+i)^n)-1)

5340*10.6%/(((1+10.6%)^3)-1)

=1603.971602

So he will have to save $1603.97 each Year