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Assume that, starting next year, you will make deposits of $744 each year into a savings account
Assume that, starting next year, you will make deposits of $744 each year into a savings account. You will make a total of 6 annual deposits. If the savings account interest rate is 11%, what is the present value of this savings plan?
Assume that you wish to make annual deposits into a savings account. The interest rate offered by the bank is 6%, and you plan to save for the next 8 years. If your goal is for the present value of your savings to be equal to $2,771, how much money must you deposit every year?
Expert Solution
Computation of Present Value of Saving Plan using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Present Value of Saving Plan = ?
Rate = 11%
Nper = 6
PMT = 744
FV = 0
Substituting the values in formula:
=-pv(11%,6,744,0)
PV or Present Value of Saving Plan = $3,147.52
Computation of Annual Deposit using PMT Function in Excel:
=pmt(rate,nper,-pv,fv)
Here,
PMT = Annual Deposit = ?
Rate = 6%
Nper = 8 years
PV = $2,771
FV = 0
Substituting the values in formula:
=pmt(6%,8,-2771,0)
PMT or Annual Deposit = $446.23
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