A local furniture store is advertising a deal in which you buy a $4,700 living room...

A local furniture store is advertising a deal in which you buy a $4,700 living room set with three years before you need to make any payments (no interest cost is incurred).

How much money would you have to deposit now in a savings account earning 6 percent APR, compounded monthly, to pay the $4,700 bill in three years?

How much would you have to deposit in the savings account each month to be able to pay the bill?

Expert Solution

Payment to be made after 3 years = 4700, APR = 6%

Monthly rate = APR / No of months in a year = 6% / 12 = 0.50%

Period = 3 years = 3 x 12 months = 36 months

Calculating Amount to deposit now in savings account

To find the money to deposit in savings bank account now, we will make use of pv function in excel

Formula to be used in excel: =pv(rate,nper,pmt,-fv)

Using pv fuction in excel, we get amount to be deposited now = $3927.53

Calculating amount to deposited in savings account each month

To find the amount to be deposited per month (at the end of the month), we will use pmt function in excel

Formula to be used in excel: =pmt(rate,nper,pv,-fv)

Using pmt function in excel, we get amount to be deposited per month =119.48

jeff jeffy answered 1 year ago

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