Question

Answer the following:

A. Suppose you are trying to accumulate a balance of $10,000 by the end of 8 years. You are trying to figure out how much you would have to save at the beginning of each year for the next 8 years in an account earning 3% interest to reach your target. Which formula would you use to solve for the cash flows?

FV of an annuity

PV of an annuity

FV of an annuity due

PV of an annuity due

PV of a perpetuity

B. Suppose you have $10,000 in an account earning 3% interest per year. You would like to make annual withdrawals at the end of each year for the next 8 years. You are trying to figure out the most you could withdraw annually without depleting the account before 8 years. Which formula would you need to use to solve for the cash flows?

FV of an annuity due

PV of an annuity due

FV of an annuity

PV of an annuity

PV of a perpetuity

Answer 1

A). Amount needed in 8 years is $10000

So, Future value needed is $10000

Annual deposit are made at start of each period. So it is an annuity due.

So, we use formula of FV of an annuity due to calculated the annual payment.

Option C is correct.

B). Amount available now = $10000

So, present value = $10000

Annual withdrawal are made at the end of each year for next 8 years. So it is an ordinary annuity.

So formula used to calculated annual withdrawal is PV of an annuity.

Option D is correct.