Question

To complete your last year in business school and then go through law school, you will...

To complete your last year in business school and then go through law school, you will need $20,000 per year for 4 years, starting next year (that is, you will need to withdraw the first $20,000 one year from today). Your uncle offers to put you through school, and he will deposit in a bank paying 6.54% interest a sum of money that is sufficient to provide the 4 payments of $20,000 each. His deposit will be made today.

How large must the deposit be? Round your answer to the nearest cent. _______$

How much will be in the account immediately after you make the first withdrawal? Round your answer to the nearest cent. _______$

How much will be in the account immediately after you make the last withdrawal? Round your answer to the nearest cent. Enter "0" if required _______$

Homework Answers

Answer #1

1.

PVOrdinary Annuity = C*[(1-(1+i/100)^(-n))/(i/100)]
C = Cash flow per period
i = interest rate
n = number of payments
PV= 20000*((1-(1+ 6.54/100)^-4)/(6.54/100))
PV = 68453.71

2.

Amount after withdrawal = FV year 1 - one year fees

Future value = present value*(1+ rate)^time
Future value = 68453.71*(1+0.0654)^1
Future value = 72930.58

amount = 72930.58-20000 = 52930.58

3.

amount after last withdrawal will be as deposit amount is large enough to only fund all 4 withdrawals

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