(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.