Question

Jason's opportunity cost rate is 8 percent compounded annually. How much must he deposit in an account today if he wants to receive $5,400 at the end of each of the next 10 years? Use a financial calculator to determine the amount to be deposited today.

Answer 1

Answer: The answer is $ 11, 658.06

Explanation:

Using the compound interest formula

A = P ( 1+r/100)∧n

A= 5,400 (1+8/100)∧10

A= 5,400 ( 1.08)∧10

A= 5,400 ( 2.1589)

A= 5,400*2.1589

A = 11, 658.06

Therefore, he would deposit $ 11,658.06

Answer 2

Answer:

There're 2 answers:

1) If he want to receive both interest and principal of $5,400, the amount to be deposited today is $36,234. In this case, he doesn't receive any principal back.

2) If he want to receive interest of $5,400 only , the amount to be deposited today is $67,500. In this case, he can receive back $67,500 at end of deposit.

Explanation:

1) In excel there function to calculate this = PV(rate, number of payment, amount in each payment) = PV(8%,10,5400)

2) If $5,400 is interest  Jason can receive at end  of each year = Deposit amount x 8%; thus deposit amount is 67,500 = 5,400/8%