Computing annuity payment: Maricela Sanchez needs to have $25,000 in five years. If she can earn 8 percent on any investment, what is the amount that she will have to invest every year at the end of each year for the next five years? (Round to the nearest dollar.)

Question

Quizplus · Accepted Answer

Using the formula for the present value of an ordinary annuity:

PV = PMT x [(1 - (1 + r)^-n) / r]

Where:
PV = present value (amount needed in 5 years)
PMT = payment amount
r = interest rate (8% or 0.08)
n = number of periods (5 years)

Substituting the given values:

25000 = PMT x [(1 - (1 + 0.08)^-5) / 0.08]

Solving for PMT:

PMT = 4260.56

Rounding to the nearest dollar:

PMT = $4,261

Therefore, the best choice is B.

Computing Annuity Payment: Maricela Sanchez Needs to Have $25,000 in Five