Question

A supplier of certain suspension system parts for General Motors wants to have a contingency fund that it can draw on during down periods of the economy. The company wants to have $10 million in the fund 5 years from now. If the company deposits $1million now, what uniform amount must it add at the end of each of the next 5 years to reach its goal if the fund earns a rate of return of 10% per year ,is closest to ?

    A.  
$ -1304200

    B.  
$ -1372200

    C.  
$ -1370200

    D.  
$ -1374200

Answer 1

Answer:

Correct option is option D, i.e. -1374200.

Total amount required at the end of year 5 =$10 million.

Amount deposited now =$1 million.

Future value of $ 1 million deposited now at the end of 5 year=$1 million(1+10%)⁵=1610510.

Remaining amount required at the end of 5 year to be collected from annuities=10 million-1610510=$8389490.

Amount of annual deposits to collect $8389490, can be calculated using formula as follows:

F=

$8389490=

A=$838949/6.1051=$1374200 (Approx.)