You are a well-paid engineer with a well-established international corporation. In planning for your retirement, you are optimistic and expect to make an investment of $10,000 in year 1 and increase this amount by 10% each year. How long will it take for your account to have a future worth of $2,000,000 at a rate of return of 7% per year?
What will be an ideal response?
First set up equation to find present worth of $2,000,000 and set that equal to P in the geometric gradient equation. Then, solve for n.
P = 2,000,000(P/F,7%,n)
2,000,000(P/F,7%,n) = 10,000{1 – [(1+0.10)/(1+0.07)]n}/(0.07 – 0.10)
Solve for n using Goal Seek or trial and error.
By trial and error, n = is between 25 and 26; therefore, n = 26 years
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