Question

In planning for your retirement, you have decided that you would like to be able to withdraw $60,000 per year for a 10 year period. The first withdrawal will occur 20 years from today.

a. What amount must you invest today if your return is 10% per year?
b. What amount must you invest today if your return is 15% per year?

Answer 1

a. $66,309

b. $24, 333

Step-by-step explanation:

In both scenarios, the Cash Flows are uneven. thus we need to be careful the way we use the Time Value of Money. What we will be looking for is the Net Present Value - the Initial cost of the Investment.

Step 1

The summary of cash flows for this project can be shown as follows :

Year 0 = ? (to be calculated)

Year 1 to Year 19 = 0

Year 20 to Year 30 = $60,000

Step 2

Using the CFj Function of the Financial calculator, we can then calculate the Net Present Value as :

Part a

$0 CFj

19 Nj

$60,000 CFj

10 Nj

10 % I/YR

Shift NPV = $66,309

Part b

$0 CFj

19 Nj

$60,000 CFj

10 Nj

15 % I/YR

Shift NPV = $24,333