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25 September, 08:50

You are saving for retirement. To live comfortably, you decide that you will need $2.5 million dollars by the time you are 65. If today is your 30th birthday, and you decide, starting today, and on every birthday up to and including your 65th birthday, that you will deposit the same amount into your savings account. Assuming the interest rate is 5%, the amount that you must set aside each year on your birthday is closest to

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  1. 25 September, 09:42
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    The answer is $26086

    Explanation:

    Solution

    Given that:

    Future of Annuity = 2.5 million

    The interest rate = 5%

    Time period = 35 (65-30)

    Now

    The future of annuity = Annuity [ (1+rate) ^time period-1]/rate

    Thus

    $2,500,000 = Annuity[ (1.05) ^36-1]/0.05

    $2,500,000 = Annuity[ (4.79186135) ]/0.05

    $2,500,000 = Annuity (95.83632272)

    $2,500,000=Annuity*95.83632272

    Annuity=$2,500,000/95.83632272

    =$26086

    Therefore the amount hat you must set aside each year on your birthday is closest to $26086
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