As part of your retirement plan, you want to set up an annuity in which a regular payment of $50,000 is made at the end of each year. You need to determine how much money must be deposited earning 4.5% compounded annually in order to make the annuity payment for 20 years.

Question

Mathematics

Leroy Madden

7 July, 00:04

As part of your retirement plan, you want to set up an annuity in which a regular payment of $50,000 is made at the end of each year. You need to determine how much money must be deposited earning 4.5% compounded annually in order to make the annuity payment for 20 years.

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Alexandria Wade · Answer 1

The present worth of money, P, that needs to be deposited in order to have an annuity amount, A is calculated through the equation,

PV = A x ((1 - (1 + i) ^-n) / i) x (1 + i)

where i is the interest rate and n is the number of years.

Substituting the known values in the equation,

PV = ($50,000) x ((1 - (1 + 0.045) ^-20) / 0.045) x (1 + 0.045)

PV = $1,642,557.543

Thus, the amount that should be deposited is,

PV = $1,642,557.543.