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23 November, 10:49

You plan to retire in 20 years. Use present value tables to calculate whether it is better for you to save $22,000 a year for the last 10 years before retirement or $16,300 for each of the 20 years. Assume you are able to earn 10 percent interest on your investments. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1) (Use appropriate factor (s) from the tables provided and final answer to the nearest whole dollar amount.)

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  1. 23 November, 11:02
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    Decision; Option 2 is better because it would yield more future sum

    Explanation:

    The approach would be to be to determined the future of the investment for the two options and then go for the higher

    Option 1

    FV = A * ((1+r) ^n - 1) / r

    FV - Future value, r - interest rate, n - number of years, A - annual deposit

    FV = 22,000 * ((1.1) ^10 - 1) / 0.1

    = $350,623.341

    Option 2

    FV = 16,300 * (1.1^20 - 0.1) / 0.1

    =$933,582.49

    Decision; Option 2 is better because it would yield more future sum

    (about $582,959.15) more than option 1
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