Question

Management at the company you work for is offering to pay for you to complete your Executive MBA from OSU which will take $10,000 per year for 4 years starting immediately after your MS graduation in May 2020. Management will set aside a sum of money now in their Education Fund paying 7% interest that will be enough to provide the four payments of $10,000 each. While the education money has been deposited today by the management, you will need to withdraw the first $10,000 one year from today.

1) How large must the deposit be in the Education Fund?

2) How much will be in the Education Fund immediately after you
receive the first payment?

3) How much will be remaining after the last payment made to
you?

Answer #1

1) Deposit in education fund can be found using formula of PVIFA(Annuity)

PVIFA(annuity) = Annuity[1-(1/(1+r)^n / r ]

r = rate of interest = 7%,

n = no. of year = 4

=10000[1-(1/(1+7%)^4/ 7%]

=10,000[1-(1/(1+0.7)^4 / 0.07]

=10000[1-(1/1.07)^4 / 0.07]

=10000[1-0.7629 / 0.07]

=10000[0.2371/0.07]

=10000[3.387211]

=33872.11$

Thus Deposit in education fund = 33872.11 $

Statement showing balance of fund at end of each year

Year | Opening balance | Interest @ 7% | Withrawal | Closing balance |

A | B = A x 7% | C | D = A + B - C | |

1 | 33872.11 | 2371.05 | 10000.00 | 26243.16 |

2 | 26243.16 | 1837.02 | 10000.00 | 18080.18 |

3 | 18080.18 | 1265.61 | 10000.00 | 9346.79 |

5 | 9345.79 | 654.21 | 10000.00 | 0 |

2) After receiving first payment , there will be 26243.16 $ in the education fund

3) After last balance , Amount left in education fund = 0$

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