Question

The Skysong are planning for a retirement home. They estimate they will need $252,000 4 years from now to purchase this home. Assuming an interest rate of 10%, what amount must be deposited at the end of each of the 4 years to fund the home price?

Answer 1

Future Value of an Ordinary Annuity

Here, we have Future Value of the Ordinary annuity = $250,000

Annual interest rate (r) = 10.00% per year

Number of periods (n) = 4 Years

Annual payments (P) = ?

Therefore, Future Value of an Ordinary Annuity = P x [{(1+ r)ⁿ - 1} / r ]

$252,000 = P x [{(1 + 0.10)⁴ - 1} / 0.10]

$252,000 = P x [(1.4641 – 1) / 0.10]

$252,000 = P x [0.4641 / 0.10]

$252,000 = P x 4.641

P = $252,000 / 4.641

P = $54,298.64

Therefore, the amount must be deposited at the end of each year will be $54,298.64