Question

You need to cover payments on a health plan. Hence, starting 3 months from today, you want to draw $2,800 each quarter from your money market account over the next four years. If the account pays .50 percent interest per quarter, how much do you need to have in your money market account today to meet your expense needs over the next four years?

Answer 1

Present Value of annuity = P * [(1-(1+R)^-N)/R]

Where, P = Payment

N = Number of periods

R = Rate of interest per period

We have given 4 years, So, Number of quarters will be 16 and interest rate is given per quarter.

= 2800 * [( 1 - (1+0.50%)^-16)/0.50%]

= 2800 * [(1-(1.005)^-16)/0.5%]

= 2800 * [( 1 - 0.92330037488)/0.005]

= 2800 * 15.339925024

= $42951.7900672

Present value of annuity = $42951.7900672

Therefore, You will need $42951.7900672 to cover your expenses.