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Sun 18 Oct, 2015 03:27 pm
I have a question I'm having trouble with.
We have three equal yearly deposits that will be made to an account earning 6% compounded annually, with the objectie of having 10,000 in the account five years from now. What must each deposit be if the first deposit is made 2 years from now?
I'm given the answer and workings but I don't understand them.
First I have F'= F x 1/(1+i)^n = $10,000 x 1/(1+0.06)^1 = $9433.96
I'm not given an explanation on what F' is, where it comes from, or why n=1 (Instead of 3, which I assumed it would be seeing that there's 3 equal yearly payments)
F' is then later plugged into the equation A=F' x [ 0.06/(1+0.06)^3-1] =$2,963/year. final answer. I would just be interested in what these terms mean, as I am given a lack of explanation.
Thanks
@superdiabetic,
Let's restate the problem. In two years, I'm going to deposit X, in three years I'm going to deposit X and in four years I'm going to deposit X to get 10,000 in five years. The problem you have is the annuity equation only works while you are making payments. Since you stop making payments at year four, you need to back up to there. That is what F' is in your equation. F'=how much will you need at year four to get to your goal at year five. That is why n=1, because you are going back one year.
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