Life Planning Using TVM: Please show how you obtained the answer, so I can have

Question

Life Planning Using TVM: Please show how you obtained the answer, so I can have a better understanding. 1. You want to buy a $250,000 house 5 years from now. If you have no money to begin with, how much do you need to save at the end of each year to have 20% of the$250,000 purchase price? You plan to invest your savings with your broker who will allocate it into various asset classes. You hope to earn 8% on your money for the next 5 years. How much do you need to save at the end of each year? How does this change if you can only earn 6% return.

Explanation / Answer

Using 8% return on savings the years payment (PMT): $8,522.82

Using financial calculator BA II Plus - Input details:

#

FV = Future Value = -2500000*20% =

-$50,000.00

PV = Present Value =

$0.00

I/Y = Rate / Frequency =

8.000000

N = Total number of periods = Number of years x frequency =

5

CPT > PMT = Payment = Saving per year =

$8,522.82

Using 6% return on savings the years payment (PMT): $8,869.82

Using financial calculator BA II Plus - Input details:

#

FV = Future Value = -2500000*20% =

-$50,000.00

PV = Present Value =

$0.00

I/Y = Rate / Frequency =

6.000000

N = Total number of periods = Number of years x frequency =

5

CPT > PMT = Payment = Saving per year

$8,869.82

At 6% we have to save more.

Using financial calculator BA II Plus - Input details:

#

FV = Future Value = -2500000*20% =

-$50,000.00

PV = Present Value =

$0.00

I/Y = Rate / Frequency =

8.000000

N = Total number of periods = Number of years x frequency =

5

CPT > PMT = Payment = Saving per year =

$8,522.82

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