Question

Assume that 4 years from now you will need $1,000. Your bank compounds interest at an 8% annual rate.

a. How much must you deposit 1 year from now to have a balance of $1,000 4 years from now?

b. If you want to make equal payments at Years 1 through 4 to accumulate the $1,000, how much each of the 4 payments be?

c. If your father were to offer either to make the payments calculated in part b or to give you a lump sum of $750 1 year from now, which would you choose?

d. If you have only $750 1 year from now, what interest rate, compounded annually, would you have to earn to have the necessary $1,000 4 years from now? 7.4%

e. Suppose you can deposit only $186.29 each at Years 1 through 4, but you still need $1,000 at Year 4. What interest rate, with annual compounding, must you seek out to achieve your goal?

Answer 1