Question

If the interest rate is 4% per year compounded annually, suppose you want to start saving a fixed amount C every year. starting at t=0 until t=3 such that you can collect $50000 at t=5. What fixed amount C do you have to set aside every year?

Answer 1

First, let's find PV3 of $50,000 at t = 5

PV3 = 50,000/(1 + 0.04)^2

PV3 = 46,227.8106508876

With this as the future value of C payments each year, we need to find C such that:

Number of payments, n = 4 (at t=0,1,2,3)