Question

Tazin dreams of starting his own business to import consumer electronic products to his home country. He estimates he can earn 5% on his investments and that he will need to have $260,000 at the end of year 10 if he wants to give his business a good solid foundation. He now has $28,850 in his account, and he believes he can save $13,500 each year from his income, beginning now. He plans to marry at about the end of year 6 and will skip the investment contribution that year. How far below or above his $260,000 goal will he be?

Answer 1

R = 5%

Annual savings (except year 6) = $13500

Time = 10 years

Future worth of the savings = 28850*(1+5%)^10 + (13500*(1.05^5 -1)/.05)*(1.05)^5 + 13500*(1.05^4 - 1)/.05

Future worth of the savings = $200385.8

Target amount of saving = $260000

So, the saving is below the $260000.

Size of shortage from 260000 = 260000 - 200385.8

Size of shortage from 260000 = $59614.2 or $59614