Question

How much would you have to invest today in the bank at an interest rate of 10% to have an annuity of $5600 per year for 7 years, with nothing left in the bank at the end of the 7 years? (Round to nearest dollar)

Answer 1

PV = $27,263.15

It will be needed to deposit the lump sum of $27,263.15

Step-by-step explanation:

The question is asking for how much will you need to deposit in a lump sum today to withdraw for seven years the sum of $5,600 with an interest rate of 10%

In other words it is asking us for the preset value of an annuity of $5,600 with interest of 10%

Using the present value of an annuity formula of $1 we can solve for the present value of that annuity, which is the amount needed to generate this annuity

`C * (1-(1+r)^(-time) )/(rate)= PV\\`

We post our knows value and solve it:

`5,600 * (1-(1+0.10)^(-7) )/(0.10)= PV\\`

PV = $27,263.15