Question

1. John Rider wants to accumulate $100,000 to be used for his daughter’s college education. He
would like to have the amount available on December 31, 2025. Assume that the funds will
accumulate in a certificate of deposit paying 8% interest compounded annually. Required: Answer each of the following independent questions.

1. If John were to deposit a single amount, how much would he have to invest on December 31, 2020?
2. If John were to make five equal deposits on each December 31, beginning on December 31, 2021, what is the required amount of each deposit?
3. If John were to make five equal deposits on each December 31, beginning on December 31, 2020, what is the required amount of each deposit?
Answer each of the following independent questions.

2. Alex Meir recently won a lottery and has the option of receiving one of the following three
prizes:
(2a) $64,000 cash immediately, (2) $20,000 cash immediately and a six-period annuity of $8,000
beginning one year from today, or (3) a six-period annuity of $13,000 beginning one year from
today. Assuming an interest rate of 6%, which option should Alex choose?

Answer 1

1. If John were to deposit a single amount, how much would he have to invest on December 31, 2020?

Answer:

N=5, i=8, pv=$100000(0.68058)= $68058

2. If John were to make five equal deposits on each December 31, beginning on December 31, 2021, what is the required amount of each deposit?

Answer:

N=5,i=8, $100000/5.8666= $17046

3. If John were to make five equal deposits on each December 31, beginning on December 31, 2020, what is the required amount of each deposit?

Answer:

N=5, i=8, $100000/6.3359= $15783