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The Bluebird Company has a $10,000 liability it must pay three years from today. The company...

The Bluebird Company has a $10,000 liability it must pay three years from today. The company is opening a savings account so that the entire amount will be available when this debt needs to be paid. The plan is to make an initial deposit today and then deposit an additional $2,500 a year for the next three years, starting one year from today. The account pays a 3% rate of return. How much does the Bluebird Company need to deposit today? Show your work

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Answer #1

total liability = 10000

total additional payment over 3 years = 2500 +2500 +2500

add interest at 3% on the additional payment made.

that is 2500 * .03 for year 1 = 75 interest viz., = 2500 + 75 = 2575

(2500 + 2575) *.03 for year 2 = 152.25 interest viz., 5075 + 152.25 = 5227.25

5227.25 + 2500 for year 3. here we don't have interest because with the additional deposit of 2500 the 10000 liability will be cleared off. Hence the initial amount to be deposited inorder to meet the requirement of depositing 10000 will be 10000 - (5227.25+2500) viz., 10000 - 7727.5 = 2272.75

So with the initial deposit of 2272.75 the company can recover 10000 in 3 years

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