   Chapter 5, Problem 3P Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

FINDING THE REQUIRED INTEREST RATE Your parents will retire in 19 years. They currently have $350,000 saved, and they think they will need$800,000 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.

Introduction:

Future Value:

The future value is the investment value 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.

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

Given,

The present value is $350,000, The needed future value is$800,000

The time period is 19 years.

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.
• N is the time period.

Substitute $350,000 for PV,$800,000 for the FV, and 19 for N in the above formula

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