Chapter 5, Problem 31P

Fundamentals of Financial Manageme...

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

Chapter
Section

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. a. How large must the deposit be? 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=PMTĆ(1Iā1I(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=\$5,000Ć(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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