Question

You estimate that it will take five years to complete your university education. Your parents want to invest enough money today at 12 per cent to enable you to withdraw $5000 at the end of each year for the next five years with nothing left at the end of the five-year period. How much money do they need today?

please answer using Present value table

Answer 1

$ 18,023.88

Working:

Required money will be present value of annual withdrawl.

Present Value of annual withdrawl

=

Annual Withdrawl x Present value of ordinary annuity of 1 for 5 years @ 12%

=

$         5,000

x

3.604776

=

$ 18,023.88

Working:

Present Value of ordinary annuity of 1

=

(1-(1+i)^-n)/i

Where,

=

(1-(1+0.12)^-5)/0.12

i

12%

=

3.604776

n

5