Question

Thomas Taylor is saving for an Australian vacation in three years. He estimates that he will need $5,850 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 9.1 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

Thomas taylor estimates that his total vacation expense in 3 years will be $5850

He will save each year starting from at the end of year in S&P 500 equity Index fund that earns an average annual return of 9.1 percent over the next three years.

Calculating the Annual saving using future vaue of Ordinary annuity formula:-

Where, C= Periodic Savings

r = Periodic Interest rate = 9.1%

n= no of periods = 3

Future Value = $5850

C = $1782.84

So, the amount he have to save every year if he starts saving at the end of this year is $1782.84