Assume you want to have $1.5 million in an investment account on the day you pla

Question

Assume you want to have $1.5 million in an investment account on the day you plan to retire which will be 35 years from the day you start you first job. You found an investment account paying 7% annual interest compounded annually. You will deposit money into this account at the end of every year beginning one year after your start date through the day you retire. You believe your salary will increase 3% per year, so you will increase your deposit by 3% per year after the deposit at the end of your first year. (a) (11 pts) To reach your investment goal, how much will you need to deposit at the end of year 1. (b) (4 pts) Assume you want your first deposit at the end of year 1 to be 10% of your starting salary. What must be your starting salary to achieve this goal?

Explanation / Answer

a:

FV = 1,500,000

N= 35

Rate = 7%

FV = P*((1+r)^n-(1+g)^n)/ (r-g)

1500,000= P*(1.07^35-1.03^35)/(0.07-0.03)

1500,000 = P* 196.5679758

P= 7630.95

First deposit = $7630.95

b: Starting salary = 10* 7630.95

= $ 76309.50

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