Question

Lisa's opportunity cost rate is 10 percent compounded annually. how much must she deposit in an account today if she wants to receive $3,200 at the end of each of the next 12 years? use the equation method to determine the amount to be deposited today.​

Answer 1

The answer would be, $21,760

Step-by-step explanation:

The formula to be used is that of calculating the present value (PV) of the payment in the ordinary annuity (PMT). PMT are done annually, semi-annually, quarterly or monthly.

PV = PMT * ((1-(1/ (1+r) n))/r)

Where PV is the present value; PMT is the payment in an ordinary annuity; r is the opportunity cost rate; n is the number of years

in this case, PV= 3,200; r=10%, and n=12

To get PV, substitute the values given above and compute as shown below:

PV = 3,200*((1-(1/(1+0.10)12))/0.10)

PV= $21,760

With an opportunity cost of 10% compounded annually, Lisa will have to deposit $21,760 today if she wants to be receiving $3,200 at the end of each year for the next 12 years.