Computing annuity payment: Maricela Sanchez needs to have $25,000 in five years. If she can earn 8 per cent on any investment, what is the amount that she will have to invest every year for the next five years? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

This problem requires the calculation of an annuity payment. An annuity is a series of equal payments made at equal intervals over a period of time. To find the annuity payment, we can use the formula:

PV = PMT x [(1 - (1 + r)^-n) / r]

Where:
PV = present value of the annuity (in this case, $25,000)
PMT = annuity payment
r = annual interest rate (in this case, 8%)
n = number of annuity payments (in this case, 5 years)

Substituting the given values in the formula, we get:

25,000 = PMT x [(1 - (1 + 0.08)^-5) / 0.08]

Solving for PMT, we get:

PMT = 4,260.88

Rounding to the nearest dollar, we get the answer B: $4,261. Therefore, Maricela would have to invest $4,261 every year for the next 5 years to have $25,000 at the end of 5 years.

Computing Annuity Payment: Maricela Sanchez Needs to Have $25,000 in Five