Answer:
The money side aside in order to meet this future increase in the cost of living for 25 years is $429,060
Explanation:
Solution
Given that:
The first year retirement benefit is = $60,000
Expected increase of cost of living at an annual rate = 5%
Savings earn account = 7%
Now,
We find the the pension current worth
P₁ = $60,000 (P/A, i, n)
= $60,000 (P/A 7%, 25)
$60,000 (11.654)
= 699, 254
Thus,
we compute the current worth of cost of living by applying the factor of geometric series.
P₂ = $60,000 (P/A, g,i, n)
= $60,000 (P/A, 5% 7%, 25)
= $60,000 [ 1-(1+0.05)^25 + (1+0.07)^-25/0.07 -0.05]
= $60,000 (1 - 0.6239/0.02)
=$60,000 (0.3761/0.02)
= $22,566/0.02 =$1,128,300
Now, we calculate the money that will be saved
Which is $1,128,300 - $699,254
= $429,060
