Dr.J.wants to buy an IBM personal computer which will cost $2,788 four years from today.He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed.He can earn a 7% annual return.How much should he set aside?
A) $697.00
B) $627.94
C) $823.15
D) $531.81

Question

Quizplus · Accepted Answer

Using the formula for present value of annuity:
P = (C*(1-(1+r)^-n))/r
where P is the present value, C is the annual payment, r is the discount rate, and n is the number of payments.
Plug in the given values:
2788 = (C*(1-(1+0.07)^-4))/0.07
Solving for C, we get:
C = $627.94 (rounded to the nearest penny)
Therefore, Dr. J should set aside $627.94 at the end of each year.

DrJWants to Buy an IBM Personal Computer Which Will Cost