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 9% annual interest. The client wants to deposit an amount that will provide her with $1,006,000 when she retires. Currently she has $302,400 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 $1,006,000 when she retires? (Round your answer to nearest whole dollar.) Additional deposit amount

Answer 1

Answer)

Calculation of additional amount to be deposited today

Additional amount to be deposited = Total amount to be deposited – Current balance in the saving account

                                                                           = $ 504,878 - $ 302,400

                                                                           = $ 202,478.

Therefore, additional amount to be deposited today in the saving account to accumulate $ 1,006,000 at the end of 8 years at 9% annual interest is $ 202,478.

Working Note:

Calculation of total amount to be deposited today to accumulate $ 1,006,000 at the end of 8 years at 9% annual interest

Amount required at the end of 8 years = (Total amount to be deposited today X Future value of $ 1 at the end of 8 years at 9% annual interest)

            $ 1,006,000 = Total amount to be deposited today X 1.99256                              

Total amount to be deposited today = ($ 1,006,000/ 1.99256)

                                                                  = $ 504,878 (rounded off)