(Q. 4 IN B) YOU ARE SAVING MONEY TO BUY A HOUSE IN TEN YEARS. YOU W...
6. (Q. 4 in B) You are saving money to buy a house in ten years. You will need
$75,000 to make the down payment at that time. Due to some other financial
commitments you won’t be able to deposit any money in years 9 and 10 towards
this down payment. How much equal amounts must you deposit in a savings
account at the end of each year (other than years 9 and 10) in order to save
$75,000 if the savings account pays interest at 10 percent per year compounded
annually?
A) $3,875
B) $4,115
C) $5,420
D) $6,558
Answer C
The timeline of your savings account is as follows:
0 1 2 3 4 5 6 7 8 9 10
I---I---I---I---I---I---I---I---I---I---I
R R R R R R R R
$75,000 = R × (FVIFA 10%, 8yrs) × (FVIF 10%, 2yrs)
$75,000 = R x 11.4359 x 1.21
$75,000 = 13.8374R
R = $5,420.09.