Question

Suppose you are planning to spend $1,768 annually for vacation during the next 30 years. You are offered to pay $30,000 now so that annual expenses of your vacations for the next 30 years will be taken care of. The annual interest rate is 7%. Calculate the amount that is saved if you pay $1,768 annually instead of $30,000 now (Hint: calculate 30,000 - PV($1,768 paid annually)). Submit the absolute value of the difference in the two options.

Answer 1

Answer:

The amount saved is $8,060.82  by paying $1768 annually  for 30 years of $30000 now.

Explanation:

The amount saved by paying $1768 annually instead of $30000 now can be best computed by calculating the present of $1768 for 30 years at a discount of 7%.

The formula applicable here is PV=PMT*(1-(1+r)^-time)/r

PV=1768*(1-(1+0.07)^-30/0.07

PV=$21939.18

However savings =$30000-$21939.18

                                =$ 8,060.82