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Johnstone needs to accumulate sufficient funds to pay a $420,000 debt that comes due on December...

Question:

Johnstone needs to accumulate sufficient funds to pay a $420,000 debt that comes due on December 31, 2021. The company will accumulate the funds by making five equal annual deposits to an account paying 8% interest compounded annually. Determine the required annual deposit if the first deposit is made on December 31, 2016.

Future Value of Deposits

The future value of a series of deposits is the value that that they will accumulate to by a specific day in the future. The future value depends on the deposit amounts, the number of periods, the interest rate and the frequency of interest compounding.

Answer and Explanation: 1

Future value ( FV)= $420,000

NPER = 5

Rate = 8%

Annual deposits (PMT) = ?

As per the PMT function of excel, i.e.

=PMT (rate, nper, pv, -fv)

=PMT (8%, 5, 0, -420000)

= $71,591.71

The required annual deposit is equal to $71,591.71.


Learn more about this topic:

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How to Find the Value of an Annuity

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Chapter 21 / Lesson 15
9.4K

An annuity is a type of savings account that pays back the investor in the future. Learn the formula used to calculate an annuity's value, and understand the importance of labeling specific numbers to calculate an output over time.


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