Question

Brief Exercise 6-6

Henry Madison needs $270,000 in 10 years.

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How much must he invest at the end of each year, at 11% interest, to meet his needs? (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 458,581.)

Investment amount

Answer 1

Investment amount = $16,146.38

Let “ x “ be the amount to be invest at the end of each year

He we have to use the future value of an ordinary annuity formula to find out the amount to be invested at the end of each year

Future value of an ordinary annuity = x * [ (1 + r )ⁿ –1 ] / r

$270,000 = x * [ (1 + 0.11 )¹⁰ –1 ] / 0.11

$270,000 = x * [1.83941 / 0.11]

$270,000 = x * 16.72201

x = $270,000 / 16.72201

x = $16,146.38

“ Therefore. Investment amount at the end of each year = $16,146.38 “