Question

Jill starts to save money for her tuition payments needed for a reputed MBA program she wishes to begin in 5 years. Beginning today she will deposit $5000 each year into a MBA tuition account. The last payment will be made 5 years from today (i.e., she will make 6 equal annual deposits). Starting three months after making her final deposit, she will withdraw quarterly to pay tuition for each of the following 5 quarters (i.e. she will make 5 withdrawals in all). Assume that the MBA tuition account earns 1% quarterly during the period she makes withdrawals. The quarterly tuition she is committed to paying towards her MBA is closest to:

1) $6,766 2) $6,545 3) $6,610 4) $7,036 5) $6,833

Please answer. Thank you!

Answer 1

Answer:

Correct answer is:

5) $6,833

Explanation:

Annual deposit = $5,000

Effective annual rate of interest = (1 + 1%) ⁴ -1 = 4.06%

Beginning today she will deposit $5000 each year into a MBA tuition account. The last payment will be made 5 years from today (i.e., she will make 6 equal annual deposits).

To get future value after 5 years we have to:

1. Find FV of annuity due for 5 years

2. Add 6th payment of $5,000

Hence:

FV of annuity due for 5 years = FV (rate, nper, pmt, pv, type) = FV (4.06%, 5, -5000, 0, 1)

= $28,214.94

Amount after 5 years = $28,214.94 + 5000 =$33,214.94

Starting three months after making her final deposit, she will withdraw quarterly to pay tuition for each of the following 5 quarters.

Hence this is ordinary annuity for 5 periods

Quarterly withdrawal = PMT (rate, nper, pv,fv, type) = PMT(1%, 5, -33214.94, 0, 0)

= $6843.60

Closest amount from options is $6,833

Hence option 5 is correct and other options 1, 2, 3 and 4 are incorrect.