Harold Filbert is 30 years old and his salary next year will be $20,000. Harold

Question

Harold Filbert is 30 years old and his salary next year will be $20,000. Harold forecasts that his salary will increase at a steady rate of 5 percent per annum until his retirement at age 60.

(a) If the discount rate is 8 percent, what is the PV of these future salary payments?

(b) If Harold saves 5 percent of his salary each year and invests these savings at an interest rate of 8 percent, how much will he have saved by age 60?

(c) If Harold plans to spend these savings in even amounts over the subsequent 20 years, how much can he spend each year?

Explanation / Answer

Hello Sir/Mam

(a) Present Value of Salary Payments @ 8% = 380331.26

(b) Amount saved till the age of 60 = $191,357.15

(c) Assuming that Harold can earn 8% interest on the amount balance even after retirement, using excel formula, "=PMT(8%,20,-191357.15,0,0)"

Harold can spend $19,490.15 each year till 20 years.

I hope this solves your doubt.

Feel free to comment if you still have any query.

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Years Salary Present Value of Salary @8% 31 $20,000.00 $18,518.52 32 $21,000.00 $18,004.12 33 $22,050.00 $17,504.00 34 $23,152.50 $17,017.78 35 $24,310.13 $16,545.06 36 $25,525.63 $16,085.48 37 $26,801.91 $15,638.66 38 $28,142.01 $15,204.25 39 $29,549.11 $14,781.91 40 $31,026.56 $14,371.30 41 $32,577.89 $13,972.10 42 $34,206.79 $13,583.99 43 $35,917.13 $13,206.65 44 $37,712.98 $12,839.80 45 $39,598.63 $12,483.14 46 $41,578.56 $12,136.39 47 $43,657.49 $11,799.26 48 $45,840.37 $11,471.51 49 $48,132.38 $11,152.85 50 $50,539.00 $10,843.05 51 $53,065.95 $10,541.86 52 $55,719.25 $10,249.03 53 $58,505.21 $9,964.33 54 $61,430.48 $9,687.55 55 $64,502.00 $9,418.45 56 $67,727.10 $9,156.82 57 $71,113.45 $8,902.47 58 $74,669.13 $8,655.18 59 $78,402.58 $8,414.75 60 $82,322.71 $8,181.01 Total 380331.26

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