You would like to have enough money saved to receive a growing annuity for 25 years, growing
At a rate of 4% per year, the first payment being $60,000 after retirement, so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve this goal? (assume that the growing perpetuity payments start one year from the date of
Your retirement. The interest rate is 12%)?
A) $1,500,000
B) $632,390
C) $452,165
D) None of the above

Question

Quizplus · Accepted Answer

To calculate the present value of the growing perpetuity, we can use the formula:
PV = C / (r - g)
where PV is the present value, C is the first payment, r is the discount rate, and g is the growth rate.

In this case, C = $60,000, r = 12%, and g = 4%. So, we have:
PV = $60,000 / (12% - 4%) = $632,390

Therefore, the amount that needs to be saved in the retirement fund to achieve this goal is $632,390. Option B is the correct choice.

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