Question

You plan to accumulate 100,000 at the end of 42 years by making the follow-

ing deposits:
X at the beginning of years 1-14
No deposits at the beginning of years 15-32; and
Y at the beginning of years 33-42.
The annual effective interest rate is 7%.
Suppose X − Y = 100. Calculate Y.

Answer 1

Y = 479.17

Explanation:

At the end of year 14, the balance from the deposits of X can be found using the annuity due formula:

A = P(1+r/n)((1 +r/n)^(nt) -1)/(r/n)

where P is the periodic payment, n is the number of payments and compoundings per year, t is the number of years, and r is the annual interest rate.

A = X(1.07)(1.07^14 -1)/0.07 ≈ 24.129022X

This accumulated amount continues to earn interest for the next 28 years, so will further be multiplied by 1.07^28. Then the final balance due to deposits of X will be ...

Ax = (24.129022X)(1.07^28) = 160.429967X

__

The same annuity due formula can be used for the deposits of Y for the last 10 years of the interval:

Ay = Y(1.07)(1.07^10 -1)/.07 = 14.783599Y

__

Now we can write the two equations in the two unknowns:

Ax +Ay = 100,000

X - Y = 100

From the latter, we have ...

X = Y +100

So the first equation becomes ...

160.429967(Y +100) +14.783599Y = 100000

175.213566Y +16,043.00 = 100,000

Y = (100,000 -16,043)/175.213566 ≈ 479.17

Y is 479.17