Question

Ted owns a small florist shop. Since his business is booming, his realizes he will soon need one more delivery van. He decides he will purchase a full size van versus a minivan, which he currently owns. The van he is looking to buy in 3 years will cost him $40,000. How much should he invest each quarter into an account that pays 7% per year compounded quarterly, so that he can have the desired funds in 7 years?

Answer 1

Answer:

He must deposit $1,119.26 per quarter for 7 years.

Explanation:

Giving the following information:

Future value= $40,000

Number of years= 7

Interest rate= 7% compounded quarterly.

First, we need to determine the real interest rate:

Real interest rate= 0.07/4= 0.0175

Now, using the following formula, we can calculate the investment required quarterly:

FV= {A*[(1+i)^n-1]}/i

A= deposit

Isolating A:

A= (FV*i)/{[(1+i)^n]-1}

A= (40,000*0.0175) / [(1.0175^28)-1]

A= $1,119.26

He must deposit $1,119.26 per quarter for 7 years.