Dr. J. wants to buy a Dell computer which will cost $3,500 eight years from toda

Question

Dr. J. wants to buy a Dell computer which will cost $3,500 eight 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 10% annual return. How much should he set aside?

Dr. J. wants to buy a Dell computer which will cost $3,500 eight 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 10% annual return. How much should he set aside?

Explanation / Answer

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

Hence

3500=P(1.1)^7+P(1.1)^6+P(1.1)^5+........+P(1.1)^1+P

3500=P[1.1^7+1.1^6+..........+1.1^1+1]

3500=P*11.4358881

Hence P=3500/11.4358881

=$306.05(Approx).

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