A recently graduated mechanical engineer wants to build a reserve fund as a safety net to pay his expenses in the unlikely event that an unexpected emergency arises. His aim is to have $45,000 developed over the next 3 years, with the proviso that the amount must have the same purchasing power as $45,000 today. If the expected market rate on investments is 8% per year and inflation is averaging 2% per year, find the annual amount necessary to meet his goal.
What will be an ideal response?
Find amount needed at 2% inflation rate and then find A using market rate.
F = 45,000(1 + 0.02)³
= 45,000(1.06121)
= $47,754.45
A = 47,754.45 (A/F,8%,3)
= 47,754.45 (0.30803)
= $14,710
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