To complete your last year in business school and then go through law school, yo

Question

To complete your last year in business school and then go through law school, you will need $10,000 per year for 4 years, starting next year (that is, you will need to withdraw the first $10,000 one year from today). Your rich uncle offers to put you through school, and he will deposit in a bank paying 7 percent interest, compounded annually, a sum of money that is sufficient to provide the 4 payments of $10,000 each. His deposit will be made today.

a. How large must the deposit be?

b. How much will be in the account immediately after you make the first withdrawal?

Explanation / Answer

a) We need to calculate the present value of the amount that would be needed

= 10000/(1.07) +10000/(1.07)^2 ..........10000/(1.07)^4

=33872.11

b) 33872*(1.07)-10000

=36243.16-100000

=26243.16

Aftre last withdrawal amount would be zero

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