Dr. J. wants to buy a Dell computer that will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn an 8% annual return. How much should he set aside at the end of each year?
A) $879
B) $627
C) $924
D) $9,738

Question

Quizplus · Accepted Answer

To find out how much Dr. J needs to set aside at the end of each year, we use the formula for the future value of an annuity: FV = P * [(1 + r)^n - 1] / r, where FV is the future value ($3,000), P is the annual payment, r is the annual interest rate (0.08), and n is the number of periods (3 years). Rearranging the formula to solve for P gives us P = FV / [(1 + r)^n - 1] / r. Plugging in the numbers: P = $3,000 / [(1 + 0.08)^3 - 1] / 0.08 = $924.

Dr J Wants to Buy a Dell Computer That Will Cost