Question

You decide to begin saving toward the purchase of a new Camry on your 27th birthday. You have priced these cars and found that they currently sell for $20,000. You believe that the price will increase by 5 percent per year until you are ready to buy. You can presently invest to earn 10 percent. If you just turned 20 years old (today), how much must you invest at the end of each of the next 7 years to be able to purchase the Camry in 7 years? Hint: Your first payment on your 21st. birthday and your last payment on your 27th birthday. 1. $2,857.14 $4,101.11 $2,789.37 $2,966.32 $3,456.40

Answer 1

Value of car at end of 27 years = price today (1+%increase)^n

                   = 20000(1+ .05)^7

                    = 20000*(1.05)^7

                     = 20000*1.40710

                       = 28142

**n= 27 -20 = 7 years

now.

Amount to invest * FVA 10%,7 = value of car in 7 years

   x * 9.48717 = 28142

   x = 28142 /9.48717

        = 2966.32

Amount to invest at end of each of 7 years = 2966.32

correct option is "D"

**Find future value annuity factor from table or using financial calculator.