Question

Michael Jones is saving for an Australian vacation in three years. He estimates that he will need $5,340 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 10.6 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

$1603.97

Step-by-step explanation:

We are to find the present value of the annuity

the formula for finding he present value of an annuity is :

A = FV / annuity factor

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

FV = Future value = $5340

r = interest rate = 10.6%

n = number of years = 3

(1.106)^3 - 1 / 0.106 = 3.329236

a = $5,340 / 3.329236 = $1603.97