When you retire 35 years from now, you want to have $1.2 million. You think you

Question

When you retire 35 years from now, you want to have $1.2 million. You think you can earn an average of 9 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 5 years from today. How much more will you have to deposit as a lump sum if you wait for 5 years before making the deposit?

When you retire 35 years from now, you want to have $1.2 million. You think you can earn an average of 9 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 5 years from today. How much more will you have to deposit as a lump sum if you wait for 5 years before making the deposit?

Explanation / Answer

Deposit made today:

1,200,000=P*(1.09)^35

P=1,200,000/1.09^35

=$1,200,000*0.048986066

=$58783.2792

Deposit after 5 years:

1,200,000=P*(1.09)^30

P=1,200,000/1.09^30

=$1,200,000*0.075371136

which is equal to

=$90445.3632

Hence excess deposit=$90445.3632-$58783.2792

which is equal to

=$31662.08(Approx).

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