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You want to make a vacation in Europe in 5 years. The total expense for the...

You want to make a vacation in Europe in 5 years. The total expense for the trip is about $20,000 today. And the expense may expect to grow at 3% per year. If you decide to save money in the bank account at the end of each year during next 5 years for the vacation . How much you should save every year if the account earns 8% per year?

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Answer #1

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

Hence future value of $20000=$20000*(1.03)^5

=$20000*1.159274074

=$23185.48148

Hence

Future value of annuity=Annuity[(1+rate)^time period-1]/rate

$23185.48148=Annuity[(1.08)^5-1]/0.08

$23185.48148=Annuity*5.86660096

Annuity=$23185.48148/5.86660096

=$3952.11(Approx).

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