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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

REQUIRED LUMP SUM PAYMENT Starting next year, you will need $10,000 annually for 4 years to complete your education. (One year from today you will withdraw the first $10,000.) Your unde deposits an amount today in a bank paying 5% annual interest, which will provide the needed $10,000 payments.

  1. a. How large must the deposit be?
  2. b. How much will be in the account immediately after you make the first withdrawal?

a.

Summary Introduction

To calculate: Future value of annuity.

Annuity: It is an agreement under which a person pays the lump sum payment or number of small transactions and in return he will get the amount at later date or upon annuitization. The purpose of the annuity is not to the break the flow of income after retirement.

Explanation

Solution:

Formula to calculate future value of annuity is,

PVA=PMT×(1I1I(1+I)N)

Where,

  • PVA is the future value of ordinary annuity.
  • PMT is the payment amount.
  • I is the interest rate.
  • N is the number of period.

Substitute $10,000 for PMT 5% for I and 4 years for N

b.

Summary Introduction

To calculate: Amount remaining after 1st withdrawal.

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