Question

Kevin Hall is saving for an Australian vacation in three years. He estimates that he will need $5,920 to cover his airfare and all other expenses for a week-long holiday in Australia. If he can invest his money in an S&P 500 equity index fund that is expected to earn an average annual return of 10.5 percent over the next three years, how much will he have to save every year if he starts saving at the end of this year? (Round factor values to 4 decimal places, e.g. 1.5212 and final answer to 2 decimal places, e.g. 15.25.)

Answer 1

$1,779.90

Step-by-step explanation:

Formula for finding the amount he has to save, this formula would be used :

Amount = FV / annuity factor

Annuity factor = [(1 + r)^n - 1 / r]

FV = Future value = $5920

n = number of years = 3

i = interest rate = 10.5

Annuity factor = (1.105^3 - 1 ) / 0.105 = 3.326025

$5920 / 3.326025 = $1,779.90