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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

FINDING THE REQUIRED INTEREST RATE Your parents will retire in 18 years. They currently have $250,000 saved, and they think they will need $1,000,000 at retirement. What annual interest rate must they earn to reach their goal, assuming they don’t save any additional funds?

Summary Introduction

To determine: The annual interest rate.

Future value: The future value means that value of the investment, which will be realized in the future. With the help of the calculation of future value, an analysis of the amount to be invested can be made. This is very useful for the financial users and investors.

The rate of interest: The rate of interest refers to that percentage at which the money is borrowed or is taken as a loan. The amount to be paid as interest is calculated on this given percentage.

Explanation

Solution:

Given,

The present value is $250,000.

The needed future value is $1,000,000.

The time period is 18 years.

Calculate the rate of interest.

The formula to calculate the annual interest rate,

I=(FVNPV)1N1

Where,

  • FV is the future value,
  • PV is the present value,
  • I is the interest rate and
  • N is the time period.

Substitute $250,000 for PV, $1,000,000 for the FV, and 18 for N

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