The Kellys are planning for a retirement home. They estimate they will need $230,000 4 years from now to purchase this home. Assuming an interest rate of 11%, what amount must be deposited at the end of each of the 4 years to fund the home price?
| The question is based on the concept of calculation of future value of annuity. | |||||||||
| Amount to be deposited each year will be annuity amount. | |||||||||
| Future value of annuity | = | Annuity x Future value of annuity of 1 | |||||||
| $ 2,30,000 | = | Annuity x | 4.709731 | ||||||
| Annuity | = | $ 48,835.06 | |||||||
| Working: | |||||||||
| Future value of annuity of 1 | = | (((1+i)^n)-1)/i | Where, | ||||||
| = | (((1+0.11)^4)-1)/0.11 | i | 11% | ||||||
| = | 4.709731 | n | 4 | ||||||
| Thus, | |||||||||
| Annual amount to be deposited | $ 48,835.06 | ||||||||
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