You know you will need $25,000 at the end of 5 years. How much would you have to deposit annually, starting at the end of the first year, into an account earning 10% to accumulate the needed amount?
A)$3,980
B)$4,095
C)$4,435
D)$4,973
E)$5,886

Question

Quizplus · Accepted Answer

The formula to calculate the annual deposit needed to accumulate a certain amount at a certain interest rate over a certain number of years is:
Annual deposit = (Future value / Present value factor) x (interest rate / Present value factor for annuity)
Present value factor = (1 + interest rate)^(-number of years)
Present value factor for annuity = [(1 + interest rate)^(-number of years) - 1] / interest rate
Plugging in the given values, we get:
Annual deposit = (25,000 / 0.6209) x (0.10 / 3.7908) = $4,095. Therefore, the best choice is (B).

You Know You Will Need $25,000 at the End of 5