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Financial Technology Center - School of Business - Central Connecticut State University |
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Today, Bruce and Brenda each have $150,000 in an investment
account. No other contributions will be made to their investment
accounts. Both have the same goal: They each want their account to
reach $1 million, at which time each will retire. Bruce has his
money invested in risk-free securities with an expected annual
return of 5 percent. Brenda has her money invested in a stock fund
with an expected annual return of
Step 1: Find the number of years it will take for each $150,000 investment to grow to $1,000,000. BRUCE: I/YR = 5; PV = -150000; PMT = 0; FV = 1000000; and then solve for N = 38.88. BRENDA: I/YR = 10; PV = -150000; PMT = 0; FV = 1000000; and then solve for N = 19.90.
Step 2: Calculate the difference in the length of time for the accounts to reach $1 million: Bruce will be able to retire in 38.88 years, or 38.88 – 19.90 = 18.98 19 years after Brenda does.
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