Suppose you are planning to spend $1,768 annually for vacation during the next 30 years. You are offered to pay $30,000 now so that annual expenses of your vacations for the next 30 years will be taken care of. The annual interest rate is 7%. Calculate the amount that is saved if you pay $1,768 annually instead of $30,000 now (Hint: calculate 30,000 - PV ($1,768 paid annually)). Submit the absolute value of the difference in the two options.

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Catalina

Business

21 June, 09:45

Suppose you are planning to spend $1,768 annually for vacation during the next 30 years. You are offered to pay $30,000 now so that annual expenses of your vacations for the next 30 years will be taken care of. The annual interest rate is 7%. Calculate the amount that is saved if you pay $1,768 annually instead of $30,000 now (Hint: calculate 30,000 - PV ($1,768 paid annually)). Submit the absolute value of the difference in the two options.

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Keyon White · Answer 1

The amount saved is $8,060.82 by paying $1768 annually for 30 years of $30000 now.

Explanation:

The amount saved by paying $1768 annually instead of $30000 now can be best computed by calculating the present of $1768 for 30 years at a discount of 7%.

The formula applicable here is PV=PMT * (1 - (1+r) ^-time) / r

PV=1768 * (1 - (1+0.07) ^-30/0.07

PV=$21939.18

However savings = $30000-$21939.18

=$ 8,060.82