You have to make a balloon payment on your house five years from now of $15,000.If money can earn a average of 6 percent a year for the five year period,how much will you have to place in the account today to have the $15,000 in five years? To solve this problem you would use the formula for the
A)future value of an ordinary annuity.
B)present value of a lump sum.
C)present value of an ordinary annuity.
D)future value of a lump sum.

Question

Quizplus · Accepted Answer

To determine how much you need to save today to have the balloon payment amount in five years, you need to calculate the present value of the $15,000. Since you have a lump sum payment that you want to have available in the future, you would use the formula for the present value of a lump sum. Therefore, choice B, present value of a lump sum, is the best choice.

You Have to Make a Balloon Payment on Your House