How much must be deposited on January 1, 2010 in a savings account paying 6% annually in order to make annual withdrawals of $20,000 at the end of the years 2010 and 2011? The present value of one at 6% for one period is .9434.

Question

Quizplus · Accepted Answer

Step 1: Use the present value of an annuity formula to find the amount that needs to be deposited today: 
PV = (Annuity amount) x (PV factor)
PV = $20,000 x (0.9434 + 0.889)
PV = $37,740
Step 2: The amount that needs to be deposited today is $37,740. Therefore, the best choice is B, $37,740.

How Much Must Be Deposited on January 1, 2010 in a Savings