Anita is planning to go back to school in 2 years. Once at school, she wishes to be able to withdraw $900 at the end of each month for 2 years. If interest is 4.5% compounded monthly, determine the amount that should be deposited now to fulfil her goal.

Question

Quizplus · Accepted Answer

The amount that should be deposited now can be calculated using the formula for the present value of an annuity: $PV = P \times \left[\frac{1 - (1 + r)^{-n}}{r}\right]$, where $P$ is the payment amount, $r$ is the monthly interest rate, and $n$ is the total number of payments. Here, $P = $900$, $r = \frac{4.5\%}{12} = 0.00375$, and $n = 2 \times 12 = 24$. Plugging these values into the formula gives $PV = 900 \times \left[\frac{1 - (1 + 0.00375)^{-24}}{0.00375}\right]$, which calculates to approximately $18,848.06.

Anita Is Planning to Go Back to School in 2