Answer:
$488.77
Explanation:
Present value (PV) of the amount a day to his 60th birth day = Target amount ÷ (1 + r)^n ..................... (1)
Where;
r = interest rate = 15% or 0.15
n = number of year = 1
Substituting the values into equation (1), we have:
PV of the amount a day to his 60th birth day = $1,000,000 ÷ (1 + 0.15)^1 = $869,565.217391304.
To calculate the payment to make each year, we use the sinking fund formula as follows:
A = F * {r/[(1 + r)^n - 1]} ...................................... (2)
Where;
A = Annual payment
F = PV of the amount a day to his 60th birth day = $869,565.217391304.
r = interest rate = 15% or 0.15
n = number of years = 40
Substituting the values into equation (2), we have:
A = $869,565.217391304 * {0.15/[(1 + 0.15)^40 - 1]} = $488.77
Therefore, the engineer must set aside $488.77 in this project each year.