Question

You are a financial adviser working with a client who wants to retire in eight years. The client has a savings account with a local bank that pays 8% annual interest. The client wants to deposit an amount that will provide her with $1,008,000 when she retires. Currently, she has $303,200 in the account. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

How much additional money should she deposit now to provide her with $1,008,000 when she retires? (Round your answer to nearest whole dollar.)

Answer 1

Here, since deposit of money is a one time affair, so it is not an annuity. we will use simple future value (FV) of $1 to compute the required amount.

Future value = $1008000

For calculating the deposit, we will use the FV of $1 table at 8% rate for 8 periods. Below is the equation:

Future value = P * FV (8%, 8 Years)

where, P is the annual deposit to be made and FV (8%, 8 Years) is the future value of $1 at 8% for 8 years.

The value of FV (8%, 8 Years) is 1.8509. Putting this value in the above equation, we get,

$1008000 = P * 1.8509

P = $1008000 / 1.8509

P = $544600

So the annual deposit amount is $544600.

Out of this $544600 amount, $303200 is already available in the account. So, additional money required is:

Additional money required = $544600 - $303200 = $241400