Question

Me Value of Money: Practice

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Question 3 of 5
Select the correct calculation and payment.
Eric wants to save $75,000 for his child's college education in 12 years. Find the periodic deposit (payment) of an annuity earning 8%
interest, compounded annually, needed to achieve a future balance of $75,000.
75,000. 12
75,000 .012
PH
P=
+
12.3
- 1
P = 312
P = 170
75,000 .0.12
P=
75,000.00
(1 + oce)
1
P=
(1 + 912)
P= 6,098
1.12
-1
P = 3,952
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Answer 1

$3952.13

Explanation:

Annuity amount = future value / annuity factor

Annuity factor = {[(1+r)^n] - 1} / r

FV = Future value = $75,000

R = interest rate = 8%

N = number of years = 12

Annuity factor = [(1/08)^12 - 1 ] / 0.08 = 1.8977126

Annuity amount = $75,000 / 1.8977126 = $3952.13