You estimate that it will take five years to complete your university education. Your parents want to invest enough money today at 12 per cent to enable you to withdraw $5000 at the end of each year for the next five years with nothing left at the end of the five-year period. How much money do they need today?

Question

Quizplus · Accepted Answer

We can use the formula for present value of an annuity: 
PV = PMT x (1 - (1+i)^-n) / i 
where PV is the present value, PMT is the annual payment, i is the interest rate, and n is the number of periods. 
Plugging in the given values: 
PV = $5000 x (1 - (1+0.12)^-5) / 0.12 
PV = $18 025.03 
Therefore, the parents need to invest $18 025 today to meet the requirement.

You Estimate That It Will Take Five Years to Complete