Question

You have decided to start saving up to buy a house. You plan on withdrawing $25,000 at the end of year 4 for a down payment, $18,000 at the end of year 5 and again $18,000 at the end of year 6 for upgrades, and $20,000 at the end of year 7 to add a pool. How much do you need to deposit today into an account with an annual interest rate of 1.25%

Answer 1

$75,745.56

Step-by-step explanation:

In order to determine how much to deposit today, calculate the present value of the cash flows

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Cash flow in year 1 - 3 = 0

Cash flow in year 4 = $25,000

Cash flow in year 5 = $18,000

Cash flow in year 6 = $18,000

Cash flow in year 7 = $20,000

I = 1.25 %

PV = $75,745.56

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute