To complete your last year in business school and then go through law school, you will need $10,000 per year for 4 years, starting next year (that is, you will need to withdraw the first $10,000 one year from today). Your rich uncle offers to put you through school, and he will deposit in a bank paying 7 percent interest, compounded annually, a sum of money that is sufficient to provide the 4 payments of $10,000 each. His deposit will be made today.

a. How large must the deposit be?

b. How much will be in the account immediately after you make the first withdrawal?

Question

Business

Isaias Harrison

20 January, 12:12

To complete your last year in business school and then go through law school, you will need $10,000 per year for 4 years, starting next year (that is, you will need to withdraw the first $10,000 one year from today). Your rich uncle offers to put you through school, and he will deposit in a bank paying 7 percent interest, compounded annually, a sum of money that is sufficient to provide the 4 payments of $10,000 each. His deposit will be made today.

a. How large must the deposit be?

b. How much will be in the account immediately after you make the first withdrawal?

+3

Answers (1)

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Bryson · Answer 1

Instructions are listed below.

Explanation:

Giving the following information:

To complete your last year in business school and then go through law school, you will need $10,000 per year for 4 years, starting next year.

The deposit pays 7 percent interest.

Final value = $40,000

To calculate the amount of money necessary we need to use the following formula:

PV = FV / (1+i) ^n

PV = 40,000 / (1.07) = $37,383.18

First withdrawal = 10,000

Account = 40,000 - 10,000 = $30,000