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 7% annual interest. The client wants to deposit an amount that will provide her with $1,005,500 when she retires. Currently, she has $302,200 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 $1,005,500 when she retires? (Round your answer to nearest whole dollar.) Additional deposit amount

Answer 1

Here since depositing money is a one time payment, so it is not an annuity. We will use simple future value of $1 table. The future value is $1005500. We will use the below equation to find the amount of deposit needed.

Future value = P * FV (7%, 8 Years)

where, Future value = $1005500, P is the amount to be deposited and FV (7%, 8 Years) is the future value (FV) of $1 at 7% for 8 years. Its value is to be found out from future value table.

From the table, the value of FV (7%, 8 years) is 1.7182.

Putting the values in the above equation, we get,

$1005500 = P * 1.7182

P = $1005500 / 1.7182

P = $585205

So, $585205 should be deposited in the account. But, out of this $585205 amount needed, $302200 is already available. So, additional amount needed is:

Additional deposit amount = $585205 - $302200 = $283005