John just graduated from college and has his first job. His salary is that of an

Question

John just graduated from college and has his first job. His salary is that of an entry-level employee, so he has to budget his money carefully. However, he does understand the need to save money for the future.
1) Assume that he deposits $600 at the end of each year for 10 years into aninvestment account earning 7%. He then stops making deposits anduses the money instead for house and car payments. How much will bein the investment account at the end of the 10-year period?
2) Assume he decides to keep the investment but does not make any additional contributions. How much will be in the account when he retires,after working for another 25-years?
3) Assume that he does not begin saving until he has worked for 20 years. If he plans to retire in 15 years from that time, how much would hehave to invest at the end of each year, in an account earning 7%,to equal the balance in the account in part B?
4) Calculate thetotal amount of cash that he would pay in under part C. Why is there a difference?

Explanation / Answer

A) FV(annuity) = Payment * [(1+i)^n - 1] / i = 600 * [1.07^10 - 1] /.07 = 8289.87 B) 8289.87 * 1.07^25 = 44992.70 C) 44992.70 = P * [1.07^15 - 1] / .07 P = 1790.47 D) 2nd Plan: 1790.47 * 15 = 26857.05 Original Plan: 600 * 10 = 6000 The increased interest earned from investing earlier causes thosewho invest earlier to have to pay less.

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