Present Value

[dawg87]

I just need a lil help with this guys:

Stevenson Builders of London has a $67,500 liability they must pay four years from today. The company is opening a savings account so that the entire amount will be available when this debt needs to be paid. The plan is to make an initial deposit today and then deposit an additional $10,000 a year for the next four years, starting one year from today. The account pays a 5 percent rate of return. How much does the firm need to deposit today?

Help is appreciated.

 

[tkhunny]

Have I ever mentioned "Basic Principles"?

i = 0.05

r = 1.05

P = Initial Deposit

That's it. Now build it.

P + 10000(r^3 + r^2 + r + 1) = 67500

That's it. The only tricky part was the last $10,000 deposit landing on the day the acount is liquidated to pay off the loan.

In my view, NEVER worry about what formula to use. Build the right one yourself.

 

[Denis]

After you've assimilated what TK is trying to tell us (I still haven't ), you'll get this (d = initial deposit):
d(1.05^4) + 10000(1.05^4 - 1)/.05 = 67500
Solve for d.
If you can't, not much we can do for you...

TK: "In my view, NEVER worry about what formula to use. Build the right one yourself."
Well, what do we do on a "timed test"? :shock:

 

[tkhunny]

Timed Test vs Basic Principles

Do what I always did, get HIGHER marks!