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25 September, 17:04

Sarah Gray wants to invest a certain sum of money at the end of each year for five years. The investment will earn 4% compounded annually. At the end of five years, she will need a total of $45000 accumulated. How should she compute her required annual investment? g

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  1. 25 September, 17:07
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    How should she compute her required annual investment?

    $ 36.987

    Explanation:

    With the present value formula we can calculate how she has to invest today to get $45,000 at the end of the 5 years, with a compounded rate of 4%.

    Principal Present Value = F / (1 + r) ^t

    In this case we have the future value and we need to find the present value that we have to invest to get the money expected.

    Principal Present Value = 45,000 / (1 + 4%) ^5 = $36,987

    If we invest today $36,987, with a compounded interest rate of 4% we get at the end of the period, 5 years, the total sum of $45,000.
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