Question

Suppose payments were made at the end of each month into an ordinary annuity earning interest at the rate of 4.5%/year compounded monthly. If the future value of the annuity after 14 years is $50,000, what was the size of each payment? (Round your answer to the nearest cent.)

Answer 1

each payment = $214.20

Explanation:

For ordinary annuity,

FVOA = PMT x [{(1+r/m)^(n*m)} - 1/(r/m)]

Here, FVOA = $50,000

year, n = 14

Since the interest will be paid monthly, m = 12

interest rate, r = 4.5% = 0.045

PMT = ?

Putting all the values into the ordinary annuity formula,

FVOA = PMT x [{(1+r/m)^(n*m)} - 1/(r/m)]

$50,000 = PMT x [{(1+0.045/12) ^ (14*12)} - 1/(0.045/12)]

or, $50,000 = PMT x [{(1+0.045/12) ^ (14*12)} - 1/(0.045/12)]

or, $50,000 = PMT x [(1.8754 - 1)/0.00375]

or, $50,000 = PMT x [(1.8754 - 1)/0.00375]

or, $50,000 = PMT x 233.4399

or, PMT = $50,000/233.4399

PMT = $214.19

or, monthly payment will be $214.20 (Nearest cent)