On your 27th birthday you want to buy a roadster. You have priced these cars and...
On your 27th birthday you want to buy a roadster. You have priced these cars and found that they currently sell for $30,000. You believe that the price will increase by 5 percent per year until you are ready to buy. You can presently invest to earn 12 percent. If you just turned 20 years old, how much must you invest at the end of each of the next 7 years to be able to purchase the car in 7 years?
Homework Answers
Solution:
Cost of car after 7 years = $30,000 * (1+0.05)^7
= $30,000 * 1.4071 = $42,213
Amount to be invested every year to accumulate this amount = $42,213 / Cumulative FV factor at 12% for 7 periods
= $42,213 / 10.08901
= $4,184
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