Question

Paul deposits $ 1,000 into a fund at the beginning of each year for 20 years....

Paul deposits $ 1,000 into a fund at the beginning of each year for 20 years.

The fund earns interest at an annual effective rate of 8%.

At the end of 20 years, he uses the fund to purchase a perpetuity-immediate with annual payments of X, based on an annual rate of discount of 6%.

Determine X. Possible answers are 2,589 or 2,689 or 2,603 or 2,746 or 2,921.

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Answer #1
Step -1 future value after 20 th year
we have to use finanical calculator to solve this
put in calculator
PV 0
PMT -1,000
I 8%
N 20
Compute FV $45,761.96
step 2 computation of prepetuity
PV = $45,761.96
Interest rate = 6%
annual payment= 45761.96*6%
$2,746
Ans = $2,746
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