A grandfather is planning to leave his only granddaughter well off when she reaches the age of 25. He plans to deposit a lump sum now, which is her second birthday, such that she will have enough money to live comfortably without working. He wants her to have an amount that would have the same purchasing power as $2 million today. If he can invest the money now and earn an average market interest rate of 8% per year while the inflation rate averages 4% per year, what amount must he deposit?
What will be an ideal response?
Future amount required: F = 2,000,000(1 + 0.04)²³
= $4,929,431
Deposit now: P = 4,929,431(P/F,8%,23)
= 4,929,431(0.1703)
= $839,482
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