Question

Henry wants to send his son to computer school which will start one year from today. Payments of $2,000 are due at the end of each of the next two years. What lump-sum will Henry have to invest now at 12% per year in order to have $2,000 at the end of each of the next two years?

Answer 1

Henry shall invest $3,018 at present to get $2,000 at each year end for 2 years.

Step-by-step explanation:

Provided interest rate = 12%

Payment to be made is at the end of year 2 and at the end of year 3

Because it is provided that the payment has to be made at the end of next two years,

Therefore,

Present value interest factor (PVIF) @ 12% for second and third year will be considered.

As today we are at beginning of year 1

First payment will be made at end of next year that is year 2

Second payment at end of third year that is year 3

PVIF

Year 2 =
`(1)/((1+0.12)^2)` = 0.797
`*` 2,000 = $1,594

Year 3 =
`(1)/((1+0.12)^3)` = 0.712
`*` 2,000 = $1,424

Present value of investment = $1,594 + $1,424 = $3,018

Final Answer

Henry shall invest $3,018 at present to get $2,000 at each year end for 2 years.