A parent on the day the child is born wishes to determine what lump sum would...
A parent on the day the child is born wishes to determine what lump sum would have to be paid into an account bearing interest at 5% compounded annually in order to withdraw 20,000 pesos each on the child's 18th, 19th, 20th and 21st birthdays. How much is the lump sum amount?
Homework Answers
Peso 30,941.73
working;
Present value of an amount = amount * 1/ (1+r)^n
here,
r = 5%
n= number of years.
| year | cash flow | present value factor | cash flow * present value factor |
| 18 | 20,000 | 1/(1.05)^18 =>0.41552065 | (20,000*0.41552065)=>8,310.41 |
| 19 | 20,000 | 1/(1.05)^19=>0.39573396 | (20,000*0.39573396)=>7,914.68 |
| 20 | 20,000 | 1/(1.05)20=>0.37688948 | (20,000*0.37688948)=>7,537.79 |
| 21 | 20,000 | 1/(1.05)^21=>0.35894236 | (20,000*0.35894236)=>7,178.85 |
| Lumpsum amount to be deposited | Peso 30,941.73 |
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