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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

REQUIRED LUMP SUM PAYMENT Starting next year, you will need $5,000 annually for 4 years to complete your education. (One year from today you will withdraw the first $5,000.) Your undo deposits an amount today in a bank paying 6% annual interest, which will provide the needed $5,000 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 the number of small transactions and in return he gets the amount at a later date or upon annuitization. The purpose of the annuity is not to break the flow of income after retirement.

Explanation

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 $5,000 for PMT 6% for I and 4 years for N.

PVA=$5,000×(10

b.

Summary Introduction

To calculate: Amount remaining after 1st withdrawal.

Annuity:

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

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