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Janet just graduated from a women's college in Mississippi with a degree in business administration, and she is about to start a new job with a large financial services firm based in Tampa, Florida. From reading various business publications while she was in college, Janet has concluded that it is probably a good idea to begin planning for her retirement now. Even though she is only 22 years old and just beginning her career, Janet is concerned that Social Security will not be able to meet her needs when she retires. Fortunately for Janet, the company that hired her has a good retirement/investment plan that permits her to make contributions every year. So Janet is now evaluating the amount she needs to contribute to satisfy her financial requirements at retirement. She has decided that she would like to take a trip as soon as her retirement begins (a reward to herself for many years of excellent work). The estimated cost of the trip, including all expenses such as meals and souvenirs, will be $120,000, and it will last for one year (no other funds will be needed during the first year of retirement). After she returns from her trip, Janet plans to settle down to enjoy her retirement. She estimates that she will need $70,000 each year to be able to live comfortably and enjoy her "twilight years." The retirement/investment plan available to employees where Janet is going to work pays 7 percent interest compounded annually, and it is expected this rate will continue as long as the company offers the opportunity to contribute to the fund. When she retires, Janet will have to move her retirement "nest egg" to another investment so she can withdraw money when she needs it. Her plans are to move the money to a fund that allows withdrawals at the beginning of each year; the fund is expected to pay 5 percent interest compounded annually. Janet expects to retire in 40 years, and, after looking at the life insurance actuarial tables, she has determined that she will live another 20 years after she returns from her "retirement trip" around the world. If Janet's expectations are correct, how much must she contribute to the retirement fund to satisfy her retirement plans if she plans to make her first contribution to the fund one year from today, and the last contribution will be made on the day she retires?
Time value of Money