Dr. J. wants to buy a Dell computer which 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 8% annual return. How much should he set aside?
A) $879
B) $627
C) $924
D) $1,243

Question

Quizplus · Accepted Answer

To calculate the annual payment needed to reach $3,000 in three years with an 8% annual interest rate, we can use the present value of an annuity formula:

PMT = PV*(r*(1+r)^n)/((1+r)^n - 1)

where PMT is the annual payment, PV is the present value (which is $3,000), r is the annual interest rate (which is 8%), and n is the number of periods (which is 3).

Plugging in the numbers, we get:

PMT = 3000*(0.08*(1+0.08)^3)/((1+0.08)^3 - 1) = $924.16

Therefore, Dr. J should set aside $924.16 at the end of each year in order to accumulate $3,000 in three years. The best choice is C.

Dr J Wants to Buy a Dell Computer Which Will Cost