Financial Management 3

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6. Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $55,000 and you plan to spend all of it. However, you want to start saving for retirement beginning next year. You have decided that one year from today you will begin depositing 9 percent of your annual salary in an account that will earn 10 percent per year. Your salary will increase at 3 percent per year throughout your career. How much money will you have on the date of your retirement 40 years from today? (6 points)
Annual Salary=55,000
Increase rate of salary=3%
First year end salary=55,000(1+0.03)=56,650
First year savings=56,650*0.09=5,099
Growth rate of saving, g=3%
Interest rate=10%
Period=40 years
FV of saving account=First saving*[(1+Interest rate)^n-(1+g)^n]/(r-g)
=5099*[(1+0.12)^40-(1+0.03)^40]/(0.12-0.03)
= 5099*997.65
= 5,087,041.86

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