Question

To pay for your child's education, you wish to have accumulated $25,000 at the end of 15 years. To do this you plan on depositing an equal amount into the bank at the end of each year. if the bank willing to pay 7 percent compounded annually, how much must you deposit each year to reach your goal?

Answer 1

Here we will use the future value of ordinary annuity, because deposits will be made at the end of each period. To sum up, we have the following :

Future value after 15 years = $25000

Rate of interest or discounting factor = 7%

Time period = 15 years

Now, the equation becomes,

25000 = A * FVIFA (7%, 15 years),

where, A is the annual deposits required each year and FVIFA (7%,15 years) is the future value interest factor of annuity at 7% for 15 years. We will use the FVIFA table to know the value of FVIFA (7%, 15). It comes 25.1290. Now,

25000 = A * 25.1290

A = 25000 / 25.1290

A = $994.867

So, the annual deposits required are $994.867