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Assume that your parents wanted to have $160,000 saved for university by your 18th birthday and they started saving on your first birthday
Assume that your parents wanted to have $160,000 saved for university by your 18th birthday and they started saving on your first birthday. They saved the same amount each year on your birthday and earned 8% per year on their investments.
a) How much would they have to save each year to reach their goal?
b) If they think you will take five years instead of four to graduate and decide to have $200,000 saved, just in case, how much more would they have to save each year to reach their new goal?
Expert Solution
a) Computation of the annual savings:-
FV = Annual savings*((1+rate)^n - 1)/rate)
$160,000 = Annual savings *((1+8%)^18-1)/12%
Annual savings = $160,000/37.4502
= $4,272.34
b) Computation of the annual savings:-
FV = Annual savings*((1+rate)^n - 1)/rate)
$200,000 = Annual savings *((1+8%)^18-1)/12%
Annual savings = $200,000/37.4502
= $5,340.42
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