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To complete your last year in business school and go through law school, you will need...

To complete your last year in business school and go through law school, you will need $18,000 per year for 4 years, starting next year (that is, you will need to withdraw $18,000 one year from today). Your rich uncle offers to put you through school, and he will deposit in a bank time deposit paying 5 percent interest a sum of money that is sufficient to provide the four payments of $18,000 each. His deposit will be made today. How large must the deposit be?

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Answer #1

Present value of annuity = Annuity * [ 1 - 1 / ( 1 + r)n] / r

Present value of annuity = 18,000 * [ 1 - 1 / ( 1 + 0.05)4] / 0.05

Present value of annuity = 18,000 * 3.545951

Present value of annuity = $63,827.11

The deposit will be $63,827.11

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