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9 February, 13:56

Sarah wants to have $500,000 in her savings account when she retires. how much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $500,000 in 20 years?'

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  1. 9 February, 17:51
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    She mus put $107,274 in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $500,000 in 20 years.

    Explanation:

    Future Target amount = FV = $500,000

    Interest rate = r = 8% = 0.08

    Number of years = n = 20 Years

    Use Present value formula to calculate the investment to be made now to make $500,000 after 20 years.

    Present value = Future value / (1 + r) ^n

    PV = FV / (1 + r) ^n

    PV = $500,000 / (1 + 0.08) ^20

    PV = $500,000 / 4.661

    PV = $107,274.10
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