Mark Johnson saves a fixed percentage of his salary at the end of each year. This year he saved $1500. For the next 5 years, he expects his salary to increase at an 8% annual rate, and he plans to increase his savings at the same 8% annual rate. He invests his money in the stock market. Thus there will be six end-of-year investments (the initial $1500 plus five more). Solve the problem using the geometric gradient factor.
(a) How much will the investments be worth at the end of 6 years if they increase in the stock market at a 10% annual rate?
(b) How much will Mark have at the end of 6 years if his stock market investments increase only at 8% annually?