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When you retire 45 years from now, you want to have $1.25 million saved. You think you can earn an average of 7.6 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum five years from today to fund this goal. How much more will you have to deposit if you wait for five years before making the deposit?

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Answer:

$20,468.86 more if you wait

Explanation:

This is a time value of money question. You need to calculate the one time cashflow deposit (PV) as of today and as of 5 years and find the difference between the two.

As of today

Using a financial calculator, input the following;

Future value (FV) = 1,250,000

Interest rate (I/Y) = 7.6%

Duration of investment (N) = 45

Recurring payment (PMT) = 0

then compute PV = $46,276.21

As of year 5,

Future value (FV) = 1,250,000

Interest rate (I/Y) = 7.6%

Duration of investment (N) = 45 - 5 = 40

Recurring payment (PMT) = 0

then compute PV = $66,745.07

Therefore, you will pay (66,745.07 - 46,276.21) = $20,468.86 more if you wait

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