Question
In: Finance
"Assuming that your estimated total cost will grow by 2.5% per year (due to inflation), demonstrate...
"Assuming that your estimated total cost will grow by 2.5% per year (due to inflation), demonstrate how you would compute the expected future cost of your dream vacation.
Suppose that you can invest money every month into a fee-free mutual fund and that this fund is expected to have a 10% nominal annual rate of return. Using your estimated future cost (including inflation) as a future value, determine the amount of money you must save each month for the next 10 years (i.e., 120 months) to achieve your goal. Then, determine the monthly amount you must save if you delay your trip for an additional 5 years (that is, you will take the trip 15 years from today = 180 months) instead of 10 years from today. (Note: Be sure to add the 5 additional years of inflation to the estimated future cost.)"
I have identified the total cost of my vacation for $1287.
Solutions
Expert Solution
1. Let us assume, I am allocating 10000$ for my dream trip to go after 10 years. Given that inflation rate as 2.5%. using excel function = FV(2.5%, 10,10000 ) = 12800.85$ is the future value of the saved money.
2. (1 + Nominal rate) = (1+ real rate) * ( 1+ inflation rate) , Hence, the nominal rate of return includes the inflation rate.
Again taking calculated FV of 12800.85$, and taking the given nominal rate of interest of 10%, Using excel function = pmt(10%,10,0,12800.85) = 803.19$. So, Total saving per month is 66.93$.
3. Now if i delay that trip by additional 5 years,
n changes from 10 to 15,
using excel function, = pmt(10%, 15,0,12800.85) = 402.89$, the saving per month is = 402.89/12 = 33.57$.
the details of excel is attached in the picture below.
jeff jeffy answered 1 year agoRelated Solutions
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